ANNUAL REPORT 2014
VISION PASSION EXECUTION
1775 Eye Street, NW, Suite 1000, Washington, DC 20006 202.774.3200 800.565.9748 www.washreit.com
Washington Real Estate Investment Trust now does business under the name Washington REIT.
Meet the new Washington REIT. We have launched a new corporate identity, relocated our headquarters to the city center and
taken significant first steps in 2014 to reshape our portfolio for the future by acquiring high quality properties in strong, metro-centric
locations. Our VISION is to become the best-in-class owner and operator of real estate in Washington, DC. We have a new
PASSION for quality and a deep understanding of our market. And we recognize that EXECUTION is everything. In
2014, we launched an aggressive strategic plan to transform our company for growth—and create value for our shareholders.
This is just the beginning.
CORPORATE INFORMATION
WRIT Direct
Washington REIT’s dividend reinvestment
plan permits cash investment of up to the
amount specified in the plan, plus dividend,
and is IRA eligible.
Stock Information
Washington REIT is traded on the New York
Stock Exchange. The trading symbol is WRE.
Member
National Association of
Real Estate Investment Trusts®
1875 Eye Street, NW, Suite 600
Washington, DC 20006-5413
Annual CEO Certification
Washington REIT submitted the CEO Certification
required by the NYSE under Section 303A.
12(a) without qualifications.
Corporate Headquarters
Washington REIT
1775 Eye Street, NW, Suite 1000
Washington, DC 20006
202.774.3200
800.565.9748
www.washreit.com
Counsel
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Independent Registered
Public Accounting Firm
Ernst & Young LLP
8484 Westpark Drive
McLean, Virginia 22102
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, Texas 77845-3170
Annual Meeting
Washington REIT will hold its annual meeting
on May 14, 2015, at 8:30 a.m. at its corporate
office, 1775 Eye Street, NW, Suite 1000,
Washington, DC 20006
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INTENSIFYING OUR FOCUS ON URBAN,
METRO-CENTRIC LOCATIONS.
1
ANNUAL REPORT 2014 DEAR SHAREHOLDER 2014 was an exciting year for our company. We launched a three-year strategic plan to enhance our
portfolio and position the company for future growth, and took the significant first steps toward achieving our goal of
becoming a best-in-class owner and operator of real estate in Washington, DC. Coming on the heels of a leadership
change in 2013 and an intensive strategic planning process, this was a year of transition and positive change. We
strengthened our portfolio, our organization and our brand, emerging as the new Washington REIT—a more dynamic
organization with a passion for quality, execution and performance, and a renewed commitment to building value for
our shareholders.
THE PORTFOLIO There is a demographic shift under
way in our market toward urban centers that offer
walkability, public transit and rich amenities. We are
actively engaged in reshaping our portfolio to capture
the growth associated with this shift to create long-term
value for our shareholders. With the completion of the
sale of our medical portfolio in January 2014, we began
the year focused on our core asset classes—office,
retail and residential. And we faced the challenge of
reinvesting the proceeds from that sale within the tight
time frame mandated by 1031 tax exchange rules in a
competitive acquisition environment.
We moved aggressively to identify prudent acquisition
opportunities that fit with our urban transit strategy. By
year-end 2014, we had acquired four exceptional prop-
erties for $300 million. Three of these were privately
sourced transactions. All met our strategic criteria and
each one raised the quality profile of our portfolio. On
February 21, we acquired Yale West, a Class A, 216-unit,
high-rise apartment building in downtown Washington,
DC, two blocks from the Mount Vernon Square/
Convention Center Metro Station, for $73 million. On
March 26, we completed the acquisition of the Army
Navy Club Building, an iconic, 12-story office building
at the corner of Farragut Square, within a block of two
Metro stations, for $79 million. On May 1, we acquired
1775 Eye Street, situated across from the Farragut
West Metro for $104.5 million, and began renovations
there for our new corporate headquarters. Finally, on
October 1, we acquired the Spring Valley Retail Center,
a 75,000 square foot center on Massachusetts Avenue
in the city’s affluent upper Northwest quadrant for
$40.5 million.
We also executed our new developments and redevel-
opments on schedule and on budget. The Maxwell, a
new 163-unit residential development with 2,200 square
feet of retail in Arlington, VA, was substantially com-
pleted by year-end 2014 and began on-site leasing in
January 2015. The redevelopment of 7900 Westpark
in Tysons, VA, renamed Silverline Center, is expected
to be completed in the first quarter of 2015.
Last but not least, we completed an extensive renova-
tion of 1775 Eye Street and moved our new corporate
headquarters there.
THE ORGANIZATION In 2014, we restructured our
platform, created new guiding principles for our
employees and relocated to the city center—initiatives
that have helped create a culture of accountability,
teamwork and growth. Our relocation to the city’s
Central Business District is not just symbolic. It was a
crucial step in the process of setting a new direction for
the company, reflecting our shift toward a more urban
focus, a higher quality portfolio and a more dynamic
organization. 1775 Eye Street has become our marketing
center in the city’s hub. Our tenth-floor offices have
a contemporary, open-space plan that encourages
collaboration and communication. The relocation has
infused our team with a new energy and focus, and
helped us attract new talent to the company—profes-
sionals drawn to the city’s center, who want to live,
work and play downtown.
We made structural and strategic changes to the
organization to create a platform for delivering on our
commitment to build value for our shareholders.
Significantly, we made the transition to an institutional
portfolio management model that drives decision-making
around the return metrics of each asset in the portfolio.
2
WASHINGTON REIT CHARLES T. NASON, Chairman
PAUL T. McDERMOTT, President and CEO
This approach mitigates risk and facilitates an opportu-
nistic asset recycling strategy. In addition, we have
restructured the organization to improve performance,
promote accountability and enhance tenant service,
and we have outsourced leasing and other functions
to highly-experienced third parties and improved
leasing results.
As part of this ongoing transformation, we have recruited
new talent across the organization and at all levels,
including senior management. In April 2014, Thomas
Q. Bakke, formerly Market Managing Director at Equity
Office Properties (EOP), a national commercial real
estate owner and subsidiary of The Blackstone Group,
joined the company as Executive Vice President and
Chief Operating Officer. In January 2015, Stephen E.
Riffee was named Executive Vice President and Chief
Financial Officer.
We are also pleased to welcome two new members to
our Board of Trustees—Benjamin S. Butcher, Chief
Executive Officer, President and Chairman of STAG
Industrial, Inc., and Thomas H. Nolan, Jr., Chairman
and Chief Executive Officer of Spirit Realty Capital,
Inc. Both bring a wealth of REIT industry experience,
knowledge and relationships to our board. As we
welcome new members, we want to say farewell to
longtime board member, Thomas “Edgie” Russell.
Edgie’s leadership has been instrumental behind the
scenes in the growth and development of a truly
professional Board of Trustees, including the recruitment
of new board members, organization of board committees
and improvements to financial reporting. The Board of
Trustees is truly grateful for the time, effort, energy,
enthusiasm and, most of all, passion that Edgie brought
to Washington REIT.
IN CLOSING The initial, positive impact of organiza-
tional change is reflected in our 2014 results. For
the year, nearly every asset in the Washington REIT
portfolio outperformed its respective submarket. In
2014, we achieved same-store Net Operating Income
(NOI) growth of 5.3% over the prior year, driven by
occupancy gains and improved tenant retention
throughout the portfolio and across asset classes. In
addition, we closed the year by negotiating the renewal
of two significant leases—with The World Bank and
Booz Allen, representing a combined 440,000 square
feet—which substantially reduces our leasing risk in
the near term.
We are aiming for the future. In the year ahead, we will
continue to reshape the portfolio to take advantage of
the demographic changes under way in our market.
We believe our 2014 accomplishments reflect the
strength of our vision, our passion and our ability to
execute a strategic plan to position the company for
growth. We appreciate your continued support and
look forward to keeping you apprised of our progress.
CHARLES T. NASON
Chairman
PAUL T. McDERMOTT
President and CEO
3
ANNUAL REPORT 2014 VISION
SILVERLINE CENTER, TYSONS, VA
4
WASHINGTON REIT Our goal is to become a best-in-class owner and operator of real estate in
Washington, DC. That’s our vision. That’s what drives us. Today, our portfolio
consists of 55 office, residential and retail assets in the Washington, DC metropolitan
region. We are in the process of transforming that portfolio—by raising its quality
profile through redevelopments and strategic acquisitions in locations with strong
demographics in the city and urban clusters in close-in suburbs; near Metro stations
and along Metro corridors—because that’s where the growth is. As part of this
process, we’re opportunistically recycling assets that no longer fit with this urban
transit strategy, upgrading well-located properties and acquiring new assets—to
position the portfolio for future growth.
In the Office Portfolio, we acquired two high quality assets in 2014—The Army
Navy Club Building and 1775 Eye Street—both in the heart of the city’s Central
YALE WEST, WASHINGTON, DC
Business District and within easy reach of the Metrorail system.
In our Retail Portfolio, we added Spring Valley Retail Center, located in the 4800
block of Massachusetts Avenue in the city’s upper Northwest quadrant. Anchored by
a Crate & Barrel retail store, the center consists of five separate buildings of multi-
level retail space and serves one of Washington, DC’s most affluent neighborhoods.
In the Residential Portfolio, we acquired Yale West, a newly constructed Class A,
216-unit, luxury high-rise in the city’s Mount Vernon Triangle neighborhood near
two Metro stations.
SPRING VALLEY, WASHINGTON, DC
THE ARMY NAVY CLUB BUILDING, WASHINGTON, DC
1775 EYE STREET, WASHINGTON, DC
5
ANNUAL REPORT 2014 PASSION
61775 EYE STREET, WASHINGTON, DC
WASHINGTON REIT We believe that we create our own success. The new Washington REIT has
a passion for the growth that is taking place in the urban centers of our market,
for creating value and for identifying value-add opportunities.
Today we embody our passion for urban growth centers by operating from our
new headquarters at 1775 Eye Street. Prominently located at the corner of
18th and Eye streets, it puts us in the heart of the Central Business District,
integrating Washington REIT into the local real estate community and bringing
a new energy and focus to our organization. We acquired the property in May
2014 and completed a renovation to upgrade the common areas, elevators
and amenities; add an exterior canopy; and modernize the lobby—with marble,
granite, glass and wood finishes. We take pride in the fact that this 11-story,
185,000 square foot office building with three levels of below grade parking is
our new home.
We are engaged in creating value through an active asset management strategy
and an opportunistic, value-add acquisition plan. Under our Portfolio
Management Model, seasoned asset managers and portfolio managers over-
see each individual asset with accountability for managing NOI growth and
maximizing the value of every asset in the portfolio. In 2014, we created a
Real Estate Services Group to improve tenant services and better coordinate
the tenant experience within our portfolio from signing through move-in, and
throughout the lease term. By outsourcing leasing and other functions to highly-
experienced third parties, we have streamlined our operations so the
Washington REIT team can focus on reshaping and managing our portfolio
and creating value for the future.
1775 EYE STREET, WASHINGTON, DC
1775 EYE STREET, WASHINGTON, DC
7
ANNUAL REPORT 2014 EXECUTION
THE MAXWELL, ARLINGTON, VA
8
WASHINGTON REIT SILVERLINE CENTER, TYSONS, VA
THE MAXWELL, ARLINGTON, VA
In 2014, as part of our strategy to raise the quality of our portfolio, we delivered
a major new development and undertook a substantial redevelopment in key
high-growth Northern Virginia submarkets.
The Maxwell was completed in the first quarter of 2015 in a prime location in
Arlington, VA. A luxury 163-unit building with high-end amenities and design
features; it is located within a half-mile of the Ballston Metro Station, down the
block from a Harris Teeter supermarket and across from the Ballston Common
Mall in a neighborhood teeming with activity. Built according to LEED Silver
standards, The Maxwell began on-site leasing in January 2015. The property’s
2,200 square feet of retail space is leased to a fitness center that adds another
level of uniqueness to this first class project.
We commenced the redevelopment of 7900 Westpark, rebranded as Silverline
Center. Originally acquired in 1997 and built in 1972, the 526,000-square-foot
office building is strategically located off the Capital Beltway near Tysons and
the Silver Line Metro Station. As part of the $35 million renovation begun in
2014, we have transformed the Tower Lobby into a two-story space, upgraded
the common areas, added amenities—including a conference facility, and
completed a dramatic renovation of the exterior.
Both projects reflect our ability to execute a transformational plan to position
Washington REIT for growth. We enter 2015 a streamlined and revitalized
organization with a motivated workforce, focused senior management and a
portfolio positioned to capture growth in the Washington Metro region.
9
ANNUAL REPORT 2014 OFFICERS
Paul T. McDermott, President and Chief Executive Officer
Stephen E. Riffee, Executive Vice President and Chief Financial Officer
Thomas Q. Bakke, Executive Vice President and Chief Operating Officer
Laura M. Franklin, Executive Vice President, Accounting and Administration
Thomas C. Morey, Senior Vice President, General Counsel and Corporate Secretary
Edward J. Murn, Managing Director, Head of Residential Division
Paul S. Weinschenk, Managing Director and Vice President, Head of Retail Division
TRUSTEES
Charles T. Nason, Chairman, Washington REIT; Retired Chairman, President and Chief Executive Officer, The Acacia Group
Paul T. McDermott, President and Chief Executive Officer, Washington REIT
Benjamin S. Butcher, Chief Executive Officer, President and Chairman of the Board of Directors of STAG Industrial, Inc.
William G. Byrnes, Retired Managing Director, Alex Brown & Sons
Edward S. Civera, Retired Chairman, Catalyst Health Solutions, Inc.
John P. McDaniel, Retired Chief Executive Officer, MedStar Health
Thomas H. Nolan, Jr., Chairman of the Board and Chief Executive Officer of Spirit Realty Capital Inc.
Thomas Edgie Russell, III, Retired President, Partners Realty Trust, Inc.
Wendelin A. White, Chair of Morris, Manning & Martin LLP’s (MMM) D.C. real estate practice and Co-Managing Partner of MMM’s D.C. office
Vice Admiral Anthony L. Winns (RET.), President, Middle East-Africa Region, Lockheed Martin International, at Lockheed Martin Corporation
10
WASHINGTON REIT 2014 FORM 10-K
Washington Real Estate Investment Trust
12
WASHINGTON REIT FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Washington, D.C. 20549
[√]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-6622
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND
(State of incorporation)
53-0261100
(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:
SHARES OF BENEFICIAL INTEREST
NEW YORK STOCK EXCHANGE
Title of Each Class
Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [√] NO [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES [ ] NO [√]
Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the past
ninety (90) days. YES [√] NO [ ]
Indicate by checkmark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 regis-
trant was required to submit and post such files). YES [√] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the best of
the registrant’s knowledge in definitive proxy or information statements incorpo-
rated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[√]
Indicate by check mark whether the registrant is a large accelerated filer, an accel-
erated filer, a non-accelerated filer or a smaller reporting company. See definition
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
[√]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
Smaller reporting company
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES [ ] NO [√]
As of June 30, 2014, the aggregate market value of such shares held by non-
affiliates of the registrant was $1,718,681,391 (based on the closing price of the
stock on June 30, 2014).
As of February 24, 2015, 68,125,938 common shares were outstanding.
Documents Incorporated By Reference
Portions of our definitive Proxy Statement relating to the 2015 Annual Meeting
of Shareholders, to be filed with the Securities and Exchange Commission,
are incorporated by reference in Part III, Items 10-14 of this Annual Report on
Form 10-K as indicated herein.
13
FORM 10-K
14
WASHINGTON REIT INDEX
PART I
Page
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
39
39
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . .40
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68
68
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
69
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
PART IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
15
FORM 10-K
PART I
ITEM 1. BUSINESS
Washington REIT Overview
Washington Real Estate Investment Trust (“Washington REIT”) is a self-
administered equity real estate investment trust (“REIT”) successor to a trust
organized in 1960. Our business consists of the ownership and operation of
income-producing real property in the greater Washington metro region. We
own a diversified portfolio of office buildings, multifamily buildings and retail
centers. During 2013 we implemented a plan to sell our entire medical office
segment, and completed the final phase of this plan early in 2014.
Our geographic focus is based on two principles:
1. Real estate is a local business that is more effectively selected and managed
by owners located, and with expertise, in the region.
2. Geographic markets deserving of focus must be among the nation’s best
markets with a strong primary industry foundation and diversified enough to
withstand downturns in their primary industry.
While we have historically focused most of our investments in the greater
Washington metro region, in order to maximize acquisition opportunities we also
may consider opportunities to duplicate our Washington-focused approach in
other geographic markets which meet the criteria described above.
Our current strategy is focused on properties inside the Washington metro
region’s Beltway, near major transportation nodes and in areas with strong
employment drivers and superior growth demographics. We will seek to con-
tinue to upgrade our portfolio as opportunities arise, funding acquisitions with
a combination of cash, equity, debt and proceeds from property sales.
All of our officers and employees live and work in the greater Washington
metro region.
Washington Metro Region Economy
The Washington metro region experienced modest job growth during 2014, as
job growth in the private sector was partially offset by job losses in the federal
government. Current estimates by Delta Associates/Transwestern Commercial
Services (“Delta”), a national full service real estate firm that provides market
research and evaluation services for commercial property, indicate that the
Washington metro region gained 17,600 jobs during the 12 month period ending
October 2014. The region’s unemployment rate was 4.7% at October 2014,
down from 5.7% in the prior year. Though job growth in 2014 lagged behind
other large metro regions, the Washington metro region’s unemployment rate
remains one of the lowest in the nation.
Delta expects the Washington metro region’s modest job growth to continue
in 2015.
Washington Metro Region Real Estate Markets
The Washington metro region’s slow growth is reflected in the real estate market
performance in each of our segments. Market statistics and information for the
Washington metro region from Delta are set forth below:
Office Segment
Increase (decrease) in average effective rents
Direct vacancy rate at year end
Net absorption (in millions of square feet)(1)
Office space under construction at year end
(in millions of square feet)
2014
1.3%
11.1%
0.4
4.1
2013
(2.9)%
10.8%
1.8
6.4
(1) Net absorption is defined as the change in occupied, standing inventory from one year to the next.
These statistics reflect slow growth in the office market due to a harsh winter in
the first quarter of 2014 and the effects of Federal government austerity. In addi-
tion, growth in the private sector was hampered by densification (the reduction
16
WASHINGTON REIT in square feet leased per worker). However, the Washington metro region contin-
ues to have one of the lowest direct vacancy rates among large markets in the
United States, well below the national average of 13.4%. Delta projects gradual
improvement in office vacancy during 2015.
25 office properties, 17 retail centers and 14 multifamily properties. The percent-
age of total real estate rental revenue by segment for 2014, 2013 and 2012, and
the percent leased as of December 31, 2014, were as follows:
Retail Segment
Increase in rental rates at grocery-anchored centers
Vacancy at grocery-anchored centers at year end
2014
2.3%
4.6%
2013
2.2%
4.7%
Percent Leased
December 31, 2014(2)
89%
95%
96%
Office
Retail
Multifamily(3)
% of Total Real Estate Rental Revenue(1)
2014
57%
21%
22%
100%
2013
58%
21%
21%
100%
2012
58%
21%
21%
100%
The retail real estate market in the Washington metro region continues to show
steady, but modest, improvement. While slightly improved from the prior year,
vacancy at grocery-anchored centers remains above pre-recession levels.
Delta projects some growth in 2015 due to low unemployment and rising house-
hold incomes.
(1) Data excludes discontinued operations.
(2) Calculated as the percentage of physical net rentable area leased, except for multifamily, which is calcu-
lated as the percentage of units leased.
(3) We substantially completed major construction activities at The Maxwell by the end of 2014. However, as of
December 31, 2014, only two of six residential floors were available for occupancy. Therefore, we will not
include The Maxwell’s units in our leasing and occupancy calculations until the first quarter of 2015.
Multifamily Segment
Increase (decrease) in net effective rents
(all investment grade)
Increase (decrease) in net effective rents (Class A)
Stabilized vacancy rate (all investment grade)
Stabilized vacancy rate (Class A)
2014
2013
1.2%
1.0%
4.6%
5.6%
(1.8)%
(3.0)%
4.9%
4.7%
New Class A and B apartment deliveries (# of units)
14,286
10,671
The multifamily real estate market remained steady despite the large influx
of new supply, though the higher Class A stabilized vacancy rate reflects the
increased competition. Class A and B apartment deliveries are projected to
increase to 16,416 units in 2015. Due to this new supply, Delta projects vacancy
to increase and rental rates to decrease during 2015.
Our Portfolio
As of December 31, 2014, we owned a diversified portfolio of 56 properties,
totaling approximately 7.4 million square feet of commercial space and 3,053
residential units, and land held for development. These 56 properties consist of
On a combined basis, our commercial portfolio (i.e., our office and retail proper-
ties) was 91% leased at December 31, 2014, 92% leased at December 31, 2013
and 88% leased at December 31, 2012.
The commercial lease expirations at properties classified as continuing opera-
tions for the next five years and thereafter are as follows:
Gross
Annual Rent
(in thousands)
Percentage
of Total Gross
Annual Rent
2015
2016
2017
2018
2019
2020 and thereafter
Total
# of
Leases
138
134
132
119
120
312
955
Square
Feet
605,340
623,107
782,288
796,378
787,741
$ 18,667
20,642
27,462
21,531
30,405
2,904,413
102,712
6,499,267
$221,419
8%
9%
12%
10%
14%
47%
100%
Total real estate rental revenue from continuing operations was $288.6 million
for 2014, $263.0 million for 2013 and $254.8 million for 2012. During the three
year period ended December 31, 2014, we acquired three office properties, two
17
FORM 10-K multifamily properties and one retail property, and substantially completed major
construction activities at one multifamily development project. During that same
period, we sold our entire medical office segment, four office properties and a
parcel of land at a retail property.
According to Delta, the professional/business services and government sec-
tors constituted over one third of payroll jobs in the Washington metro area at
the end of 2014. Due to our geographic concentration in the Washington metro
area, a significant amount of our tenants have historically been concentrated in
the professional/business services and government sectors, although the exact
amount will vary from time to time. As a result of this concentration, we are sus-
ceptible to business trends (both positive and negative) that affect the outlook
for these sectors. In particular, a significant reduction in federal government
spending could seriously impact these sectors.
No single tenant accounted for more than 5.0% of real estate rental revenue in
2014, 2013 or 2012. All federal government tenants in the aggregate accounted
for less than 1.0% of our 2014 real estate rental revenue. Federal government
tenants include the Department of Defense, Social Security Administration,
Federal Bureau of Investigation and Office of Personnel Management.
Our ten largest tenants, in terms of real estate rental revenue for 2014, are
as follows:
1. World Bank
2. Advisory Board Company
3. Booz Allen Hamilton, Inc.
4. Patton Boggs LLP
5. Engility Corporation
6. Epstein, Becker & Green, P.C.
7. ManTech International Corporation
8. George Washington University
9. General Services Administration
10. TJX Companies
We enter into arrangements from time to time by which various service pro-
viders conduct day-to-day property management and/or leasing activities at
18
our properties. Bozzuto Management Company (“Bozzuto”) began conducting
property management and leasing services at our multifamily properties in the
third quarter of 2014. Bozzuto provides such services under individual property
management agreements for each property, each of which is separately termi-
nable by us or Bozzuto. The fees charged by Bozzuto under each agreement
are approximately 3% of revenues at the property.
We expect to continue investing in additional income-producing properties
through acquisitions, development and redevelopment. We invest in proper-
ties in which we believe we will be able to improve the operating results and
increase the value of the property. Our properties typically compete for tenants
with other properties throughout the respective areas in which they are located
on the basis of location, quality and rental rates.
We make capital improvements to our properties on an ongoing basis for the
purpose of maintaining and increasing their value and income. Major improve-
ments and/or renovations to the properties during the three years ended
December 31, 2014 are discussed in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, under the heading
“Capital Improvements and Development Costs.”
Further description of the property groups is contained in Item 2, Properties,
Note 13, Segment Information and in Schedule III. Reference is also made
to Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
On February 23, 2015, we had 181 employees including 103 persons engaged
in property management functions and 78 persons engaged in corporate, finan-
cial, leasing, asset management and other functions.
REIT Tax Status
We believe that we qualify as a REIT under Sections 856-860 of the Internal
Revenue 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 (which is, generally, our ordinary taxable income, with certain
modifications), excluding any net capital gains and any deductions for dividends
paid, to our shareholders on an annual basis. When selling a property, we gen-
erally have the option of (a) reinvesting the sales proceeds of property sold, in
WASHINGTON REIT 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, pay-
ing the tax on the gain deemed distributed and allocating the tax paid as a credit
to our shareholders.
Generally, and subject to our ongoing qualification as a REIT, no provisions for
income taxes are necessary except for taxes on undistributed taxable income
and taxes on the income generated by our taxable REIT subsidiaries (“TRS’s”).
Our TRS’s are subject to corporate federal and state income tax on their taxable
income at regular statutory rates (see note 1 to the consolidated financial state-
ments for further disclosure).
Tax Treatment of Recent Disposition Activity
We sold the following properties during the three years ended December 31, 2014:
Availability of Reports
Property
Type
Medical Office Portfolio
Rentable
Square Feet
Contract
Sales Price
(in thousands)
Gain on Sale
(in thousands)
Transactions III & IV(1) Medical Office
427,000
$193,561
$105,985
5740 Columbia Road
Retail
3,000
1,600
570
Total 2014
430,000
$195,161
$106,555
Atrium Building
Office
79,000
$ 15,750
$ 3,195
Medical Office Portfolio
Transactions I & II(1)
Total 2013
1700 Research
Boulevard
Medical Office/
Office
1,093,000
307,189
18,949
1,172,000
$322,939
$ 22,144
Office
101,000
$ 14,250
$ 3,724
Plumtree Medical Center Medical Office
33,000
8,750
1,400
Total 2012
134,000
$ 23,000
$ 5,124
(1) Transactions I and II of the Medical Office Portfolio purchase and sale agreement consisted of medical
office properties (2440 M Street, 15001 Shady Grove Road, 15505 Shady Grove Road, 19500 at Riverside
Park (formerly Lansdowne Medical Office Building), 9707 Medical Center Drive, CentreMed I and II,
8301 Arlington Boulevard, Sterling Medical Office Building, Shady Grove Medical Village II, Alexandria
Professional Center, Ashburn Farm Office Park I, Ashburn Farm Office Park II, Ashburn Farm Office Park
III, Woodholme Medical Office Building), two office properties (6565 Arlington Boulevard and Woodholme
Center) and undeveloped land (4661 Kenmore Ave). Transactions III and IV consisted of Woodburn Medical
Park I and II and Prosperity Medical Center I, II and III.
All disclosed gains on sale are calculated in accordance with U.S. generally
accepted accounting principles (“GAAP”). We reinvested a portion of the
Medical Office Portfolio sales proceeds in replacement properties through
deferred tax exchanges.
We distributed all of our ordinary taxable income for the years ended
December 31, 2014, 2013 and 2012 to our shareholders.
Copies of this Annual Report on Form 10-K, as well as our Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to such reports
are available, free of charge, on the Internet on our website www.washreit.com.
All required reports are made available on the website as soon as reasonably
practicable after they are electronically filed with or furnished to the Securities
and Exchange Commission. The reference to our website address does not
constitute incorporation by reference of the information contained in the website
and such information should not be considered part of this document.
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our shareholders.
We refer to the shares of beneficial interest in Washington REIT as our “common
shares,” and the investors who own shares as our “shareholders.” This section
includes or refers to certain forward-looking statements. You should refer to the
explanation of the qualifications and limitations on such forward-looking state-
ments beginning on page 64.
Risks Related to our Business and Operations
Our performance and value are subject to risks associated with our real
estate assets and with the real estate industry, which could adversely
affect our cash flow and ability to pay distributions to shareholders.
Our financial performance and the value of our real estate assets are subject
to the risk that if our office, retail and multifamily properties do not generate
revenues sufficient to meet our operating expenses, debt service and capital
expenditures, our cash flow and ability to pay distributions to our shareholders
will be adversely affected. The following factors, among others, may adversely
affect the cash flow generated by our commercial and multifamily properties:
19
FORM 10-K • downturns in the national, regional and local economic climate;
• declines in the financial condition of our tenants;
• declines in consumer confidence, unemployment rates and consumer tastes
and preferences;
• significant job losses in the government or professional/business services
industries;
• competition from similar asset type properties;
• the inability or unwillingness of our tenants to pay rent increases;
• changes in market rental rates and related concessions granted to tenants
including, but not limited to, free rent and tenant improvement allowances;
• local real estate market conditions, such as oversupply or reduction in
demand for office, retail and multifamily properties;
• changes in interest rates and availability of financing;
• increased operating costs, including insurance premiums, utilities and real
estate taxes;
• vacancies, changes in market rental rates and the need to periodically repair,
renovate and re-let space;
• inflation;
• civil disturbances, earthquakes and other natural disasters, terrorist acts or
acts of war; and
• decreases in the underlying value of our real estate.
Any of these acts could adversely affect our cash flow and ability to pay dividends.
We are dependent upon the economic and regulatory climate of the
Washington metropolitan region, which may impact our profitability.
All of our properties are located in the Washington metro region, which may
expose us to a greater amount of market dependent risk than if we were geo-
graphically diverse. General economic conditions and local real estate condi-
tions in the Washington metro region are dependent upon various industries that
are predominant in our area (such as government and professional/business
services). A downturn in one or more of these industries may have a particularly
strong effect on the economic climate of our region. Additionally, we are suscep-
tible to adverse developments in the Washington D.C. regulatory environment,
such as increases in real estate and other taxes and the costs of complying with
governmental regulations or increased regulations. In the event of negative eco-
nomic and/or regulatory changes in our region, we may experience a negative
impact to our profitability and may be limited in our ability to meet our financial
obligations when due and/or make distributions to our shareholders.
We may be adversely affected by any significant reductions in federal
government spending, which could have an adverse effect on our finan-
cial condition and results of operations.
As a REIT operating exclusively in the Washington metro region, a significant
portion of our properties is occupied by tenants that are directly or indirectly
serving the United States Government as federal contractors or otherwise.
A significant reduction in federal government spending, particularly a sud-
den decrease due to a sequestration process, such as recently occurred,
could adversely affect the ability of these tenants to fulfill lease obligations or
decrease the likelihood that they will renew their leases with us. Further, eco-
nomic conditions in the Washington metro region are significantly dependent
upon the level of federal government spending in the region as a whole. In the
event of a significant reduction in federal government spending, there could
be negative economic changes in our region which could adversely impact the
ability of our tenants to perform their financial obligations under our leases or
the likelihood of their lease renewals. As a result, if such a reduction in federal
government spending were to occur, we could experience an adverse effect
on our financial condition, results of operations, cash flows and ability to make
distributions to our shareholders.
We face risks associated with property development/redevelopment.
During the fourth quarter of 2014, we substantially completed major construction
activities at The Maxwell, a mid-rise multifamily property in Arlington, Virginia.
We currently have an active redevelopment project to renovate Silverline
Center (formerly 7900 Westpark Drive), an office building in Tysons, Virginia.
We decided to delay commencement of construction of a high-rise multifamily
property at 1225 First Street in Alexandria, Virginia due to market conditions and
concerns of oversupply.
20
WASHINGTON REIT Developing or redeveloping properties presents a number of risks for us, includ-
ing risks that:
• if we are unable to obtain all necessary zoning and other required govern-
mental permits and authorizations or cease development of the project for any
other reason, the development opportunity may be abandoned or postponed
after expending significant resources, resulting in the loss of deposits or fail-
ure to recover expenses already incurred;
• the development and construction costs of the project may exceed original
estimates due to increased interest rates and increased cost of materials,
labor, leasing or other expenditures, which could make the completion of the
project less profitable because market rents may not increase sufficiently to
compensate for the increase in construction costs;
• construction and/or permanent financing may not be available on favorable
terms or may not be available at all, which may cause the cost of the project
to increase and lower the expected return;
We face risks associated with property acquisitions.
We intend to continue to acquire properties which would increase our size and
could alter our capital structure. Our acquisition activities and results may be
exposed to the following risks:
• we may have difficulty finding properties that are consistent with our strategies
and that meet our standards;
• we may have difficult negotiating with new or existing tenants;
• we may be unable to finance acquisitions on favorable terms or at all;
• the acquired properties may fail to perform as we expected in analyzing
our investments;
• the occupancy levels, lease-up timing and rental rates may not meet
our expectations;
• the actual returns realized on acquired properties may not exceed our cost
• the project may not be completed on schedule as a result of a variety of fac-
of capital;
tors, many of which are beyond our control, such as weather, labor conditions
and material shortages, which would result in increases in construction costs
and debt service expenses;
• even if we enter into an acquisition agreement for a property, we may be
unable to complete that acquisition after making a non-refundable deposit
and incurring certain other acquisition-related costs;
• the time between commencement of a development project and the stabiliza-
• we may be unable to quickly and efficiently integrate new acquisitions, partic-
tion of the completed property exposes us to risks associated with fluctuations
in the Washington metro region’s economic conditions;
ularly acquisitions of portfolios of properties, into our existing operations;
• competition from other real estate investors may significantly increase the
• occupancy rates and rents at the completed property may not meet the
purchase price;
expected levels and could be insufficient to make the property profitable; and
• there may not be sufficient development opportunities available.
• our estimates of capital expenditures required for an acquired property,
including the costs of repositioning or redeveloping, may be inaccurate;
Properties developed or acquired for development may generate little or no cash
flow from the date of acquisition through the date of completion of development.
In addition, new development activities, regardless of whether or not they are
ultimately successful, may require a substantial portion of management’s time
and attention.
These risks could result in substantial unanticipated delays or expenses and,
under certain circumstances, could prevent completion of development activi-
ties once undertaken. Any of the foregoing could have an adverse effect
on our financial condition, results of operations or ability to satisfy our debt
service obligations.
• we may be unable to acquire a desired property because of competition from
other real estate investors, including publicly traded real estate investment
trusts, institutional investment funds and private investors;
• even if we enter into an acquisition agreement for a property, it is subject to
customary conditions to closing, including completion of due diligence investi-
gations which may have findings that are unacceptable;
• we could experience a decline in value of the acquired assets after acquisi-
tion; and
• the timing of property acquisitions may lag the timing of property dispositions,
leading to periods of time where projects’ proceeds are not invested as profit-
ably as we desire.
21
FORM 10-K We may acquire properties subject to liabilities and without recourse, or with
limited recourse with respect to unknown liabilities. As a result, if liability were
asserted against us based upon the acquisition of a property, we may have to
pay substantial sums to settle it, which could adversely affect our cash flow.
Unknown liabilities with respect to properties acquired might include:
• liabilities for clean-up of undisclosed environmental contamination;
• claims by tenants, vendors or other persons dealing with the former owners
of the properties;
• liabilities incurred in the ordinary course of business; and
• claims for indemnification by general partners, directors, officers and others
indemnified by the former owners of the properties.
We face risks associated with third-party service providers, which could
negatively impact our profitability.
We enter into arrangements from time to time by which various service providers
conduct day-to-day property management and/or leasing activities at our prop-
erties. Failure of such service providers to adequately perform their contracted
services could negatively impact our ability to retain tenants or lease vacant
space. As a result, any such failure could negatively impact our profitability.
Our real estate taxes could increase due to property tax rate changes or
reassessment, which could impact our cash flows.
Real estate investments are illiquid, and we may not be able to sell our
properties on a timely basis when we determine it is appropriate to do
so which could negatively impact our profitability.
Real estate investments can be difficult to sell and convert to cash quickly, espe-
cially if market conditions are not favorable. Such illiquidity could limit our ability
to quickly change our portfolio of properties in response to changes in eco-
nomic or other conditions. Moreover, under certain circumstances, the Internal
Revenue Code (“Code”) imposes penalties on a REIT that sells property held
for less than two years and/or sells more than a specified number of properties
in a given year. In addition, for properties that we acquire by issuing units in an
operating partnership, we may be restricted by agreements with the sellers of
the properties for a certain period of time from entering into transactions (such
as the sale or refinancing of the acquired property) that will result in a taxable
gain to the sellers without the sellers’ consents. Due to these factors, we may be
unable to sell a property at an advantageous time which could negatively impact
our profitability.`
We face potential difficulties or delays renewing leases or re-leasing space
which could impact our financial condition and ability to make distributions.
As of December 31, 2014, the percentage of leased square footage of our com-
mercial properties classified as continuing operations will expire as follows:
% of Leased Square Footage
Even though we qualify as a REIT for U.S. federal income tax purposes, we are
required to pay state and local taxes on our properties. The real property taxes
on our properties may increase as property tax rates change or as our proper-
ties are assessed or reassessed by taxing authorities. Therefore, the amount
of property taxes we pay in the future may increase substantially from what we
have paid in the past. If the property taxes we pay increase, our financial con-
dition, results of operations, cash flows, per share trading price of our common
shares and our ability to satisfy our principal and interest obligations and to
make distributions to our shareholders could be adversely affected.
2015
2016
2017
2018
2019
2020 and thereafter
Total
8%
9%
12%
10%
14%
47%
100%
Multifamily properties are leased under operating leases with terms of generally
one year or less. For the years ended December 31, 2014, 2013 and 2012, the
multifamily tenant retention rate was 60%, 43% and 61%, respectively.
22
WASHINGTON REIT We derive substantially all of our income from rent received from tenants. If our
tenants decide not to renew their leases, we may not be able to release the
space. If tenants decide to renew their leases, the terms of renewals, including
the cost of required improvements or concessions, may be less favorable than
current lease terms. If the rental rates of our properties decrease, our existing
tenants do not renew their leases or we do not re-lease a significant portion of
our available and soon-to-be-available space, our financial condition, results of
operations, cash flow and our ability to satisfy our principal and interest obliga-
tions and to make distributions to our shareholders could be adversely affected.
We face potential adverse effects from major tenants’ bankruptcies
or insolvencies which could adversely affect our cash flow and results
of operations.
The bankruptcy or insolvency of a major tenant may adversely affect the income
produced by a property. We cannot evict a tenant solely because of its bank-
ruptcy. On the other hand, a court might authorize the tenant to reject and ter-
minate its lease. In such case, our claim against the bankrupt tenant for unpaid,
future rent would be subject to a statutory cap that might be substantially less
than the remaining rent actually owed under the lease. As a result, our claim for
unpaid rent would likely not be paid in full. This shortfall could adversely affect
our cash flow and results of operations. If a tenant experiences a downturn in
its business or other types of financial distress, it may be unable to make timely
rental payments.
to whether to sell a property, because neither we nor the other parties to these
investments may have full control over the entity. In addition, we may in certain
circumstances be liable for the actions of the other parties to these investments.
Each of these factors could have an adverse effect on our financial condition,
results of operations, cash flows and ability to make distributions to our share-
holders. In some instances, joint venture partners may have competing interests
that could create conflicts of interest. These conflicts may include compliance
with the REIT requirements, and our REIT status could be jeopardized if any of
our joint ventures does not operate in compliance with the REIT requirements.
To the extent our joint venture partners do not meet their obligations to us or
they take action inconsistent with our interests in the joint venture, we may be
adversely affected.
Our properties face significant competition which could adversely affect
our ability to lease our properties and result in lower cash flows.
We face significant competition from developers, owners and operators of office,
retail, multifamily and other commercial real estate. Substantially all of our
properties face competition from similar properties in the same market. Such
competition may affect our ability to attract and retain tenants and may reduce
the rents we are able to charge. These competing properties may have vacancy
rates higher than our properties, which may result in their owners being willing
to make space available at lower rents than the space in our properties. As a
result, it may be more difficult for us to lease our space, which would result in
lower cash flows.
We may suffer economic harm as a result of the actions of our partners
in real estate joint ventures and other investments which may adversely
affect our operations.
We face risks associated with short-term liquid investments which could
adversely affect our results of operations or financial condition.
We invest in joint ventures in which we are not the exclusive investor or the only
decision maker. Investments in such entities may involve risks not present when
a third party is not involved, including the possibility that the other parties to
these investments might become bankrupt or fail to fund their share of required
capital contributions, and we may be forced to make contributions to maintain
the value of the property. Our partners in these entities may have economic, tax
or other business interests or goals which are inconsistent with our business
interests or goals, and may be in a position to take actions contrary to our poli-
cies or objectives. Such investments may also lead to impasses, for example, as
We periodically have significant cash balances that we invest in a variety of
short-term investments that are intended to preserve principal value and main-
tain a high degree of liquidity while providing current income. From time to time,
these investments may include (either directly or indirectly):
• direct obligations issued by the U.S. Treasury;
• obligations issued or guaranteed by the U.S. government or its agencies;
• taxable municipal securities;
• obligations (including certificates of deposit) of banks and thrifts;
23
FORM 10-K • commercial paper and other instruments consisting of short-term U.S.
dollar denominated obligations issued by corporations and banks;
Some potential losses are not covered by insurance, which could
adversely affect our financial condition or cash flow.
• repurchase agreements collateralized by corporate and asset-
backed obligations;
• registered and unregistered money market funds; and
• other highly-rated short-term securities.
Investments in these securities and funds are not insured against loss of princi-
pal. Under certain circumstances, we may be required to redeem all or part of
our investment, and our right to redeem some or all of our investment may be
delayed or suspended. In addition, there is no guarantee that our investments in
these securities or funds will be redeemable at par value. A decline in the value
of our investment or a delay or suspension of our right to redeem may have a
material adverse effect on our results of operations or financial condition.
Compliance or failure to comply with the Americans with Disabilities
Act and other laws and regulations could result in substantial costs and
adversely affect our results of operations.
The Americans with Disabilities Act generally requires that public buildings,
including commercial and multifamily properties, be made accessible to dis-
abled persons. Noncompliance could result in imposition of fines by the federal
government or the award of damages to private litigants. If, pursuant to the
Americans with Disabilities Act, we are required to make substantial alterations
and capital expenditures in one or more of our properties, including the removal
of access barriers, it could adversely affect our results of operations.
We may also incur significant costs complying with other regulations. Our prop-
erties are subject to various federal, state and local regulatory requirements,
such as state and local fair housing, rent control and fire and life safety require-
ments. If we fail to comply with these requirements, we may incur fines or private
damage awards. We believe that our properties are currently in material compli-
ance with regulatory requirements. However, we do not know whether existing
requirements will change or whether compliance with future requirements will
require significant unanticipated expenditures that will adversely affect our
results of operations.
We carry insurance coverage on our properties of types and in amounts that
we believe are in line with coverage customarily obtained by owners of similar
properties. We believe all of our properties are adequately insured. The property
insurance that we maintain for our properties has historically been on an “all
risk” basis, which is in full force and effect until renewal in August 2015. There
are other types of losses, such as from wars or catastrophic events, for which
we cannot obtain insurance at all or at a reasonable cost.
We have an insurance policy that has no terrorism exclusion, except for
non-certified nuclear, chemical and biological acts of terrorism. Our financial
condition and results of operations are subject to the risks associated with acts
of terrorism and the potential for uninsured losses as the result of any such
acts. Effective November 26, 2002, under this existing coverage, any losses
caused by certified acts of terrorism would be partially reimbursed by the United
States under a formula established by federal law. Under this formula, the
United States pays 85% of covered terrorism losses exceeding the statutorily
established deductible paid by the insurance provider, and insurers pay 10%
until aggregate insured losses from all insurers reach $100 billion in a calendar
year. If the aggregate amount of insured losses under this program exceeds
$100 billion during the applicable period for all insured and insurers combined,
then each insurance provider will not be liable for payment of any amount
which exceeds the aggregate amount of $100 billion. On January 12, 2015, The
Terrorism Risk Insurance Program Reauthorization Act of 2015 was signed
into law and extends the program through December 31, 2020. We continue to
monitor the state of the insurance market in general, and the scope and costs
of coverage for acts of terrorism in particular, but we cannot anticipate what
amount of coverage will be available on commercially reasonable terms in future
policy years.
In the event of an uninsured loss or a loss in excess of our insurance limits, we
could lose both the revenues generated from the affected property and the capital
we have invested in the affected property. Depending on the specific circum-
stances of the affected property it is possible that we could be liable for any mort-
gage indebtedness or other obligations related to the property. Any such loss could
adversely affect our business and financial condition and results of operations.
24
WASHINGTON REIT In most cases, we have to renew our policies on an annual basis and negotiate
acceptable terms for coverage, exposing us to the volatility of the insurance
markets, including the possibility of rate increases. Any material increase in
insurance rates or decrease in available coverage in the future could adversely
affect our results of operations and financial condition.
Property ownership also involves potential liability to third parties for such
matters as personal injuries occurring on the property. Such losses may not be
fully insured. In addition to uninsured losses, various government authorities
may condemn all or parts of operating properties. Such condemnations could
adversely affect the viability of such projects. Any such uninsured loss would
adversely affect our cash flow.
Actual or threatened terrorist attacks may adversely affect our ability to
generate revenues and the value of our properties.
All of our properties are located in or near Washington D.C., a metropolitan
area that has been and may in the future be the target of actual or threatened
terrorism attacks. As a result, some tenants in our market may choose to relo-
cate their businesses to other markets. This could result in an overall decrease
in the demand for commercial space in this market generally, which could
increase vacancies in our properties or necessitate that we lease our proper-
ties on less favorable terms, or both. In addition, future terrorist attacks in or
near Washington D.C. could directly or indirectly damage our properties, both
physically and financially, or cause losses that materially exceed our insurance
coverage. As a result of the foregoing, our ability to generate revenues and the
value of our properties could decline materially which would negatively affect
our results of operations.
Potential liability for environmental matters could result in substantial
costs, which would reduce the cash available for our operations and for
distributions to our shareholders.
Under federal, state and local environmental laws, ordinances and regulations,
we may be liable for costs and damages resulting from the presence or release
of hazardous or toxic substances, wastes or petroleum products at our prop-
erties, including investigation or cleanup costs, personal or property damage,
natural resource damages, or we may be required to pay for such costs and
damages incurred by a government entity or third party regardless of our
knowledge or responsibility, simply because of our current or past ownership
or operation of the real estate. If environmental contamination issues arise, we
may have to make substantial payments, which could adversely affect our cash
flow and our ability to make distributions to our securityholders, because (1) as
a current or former owner or operator of real property we may have to pay for
property damage and for investigation and clean-up costs incurred in connec-
tion with the contamination; (2) the law typically imposes clean-up responsibility
and liability regardless of whether the owner or operator knew of or caused the
contamination; (3) even if more than one person may be responsible for the
contamination, each person who shares legal liability under such environmental
laws may be held responsible for all of the clean-up costs; and (4) governmental
entities and third parties may sue the owner or operator of a contaminated site
for damages and costs. We also may be liable for the costs of removal or reme-
diation of hazardous substances or waste at disposal or treatment facilities if we
arranged for disposal or treatment of hazardous substances at such facilities,
whether or not we own such facility.
In addition, the U.S. Environmental Protection Agency, the U.S. Occupational
Safety and Health Administration and other state and local governmental author-
ities are increasingly imposing indoor air quality standards, especially with
respect to asbestos, mold, and lead-based paint. The clean up or abatement
of any of these environmental conditions, including for asbestos and mold, can
be costly. For example, laws applicable to buildings containing certain asbes-
tos-containing materials (“ACM”) impose multiple requirements, including:
• properly managing and maintaining the ACM;
• notifying and training those who may come into contact with the ACM; and
• undertaking special precautions, including removal or other abatement, if the
ACM would be disturbed during renovation or demolition of a building.
Such laws may impose fines and penalties on building owners or operators who
fail to comply with these requirements and may allow third parties to seek recov-
ery from owners or operators for personal injury or property damage associated
with exposure to asbestos fibers.
Inquiries about indoor air quality may necessitate special investigation and,
depending on the results, remediation beyond our regular indoor air quality
testing and maintenance programs. Indoor air quality issues can stem from
25
FORM 10-K inadequate ventilation, chemical contaminants from indoor or outdoor sources,
and biological contaminants such as molds, pollen, viruses and bacteria. Indoor
exposure to chemical or biological contaminants above certain levels can be
alleged to be connected to allergic reactions or other health effects and symp-
toms in susceptible individuals. If these conditions were to occur at one of our
properties, we may be subject to third-party claims for personal injury, or may
need to undertake a targeted remediation program, including without limitation,
steps to increase indoor ventilation rates and eliminate sources of contami-
nants. Such remediation programs could be costly, necessitate the temporary
relocation of some or all of the property’s tenants or require rehabilitation of the
affected property.
The costs associated with these issues could be substantial and, in extreme
cases, could exceed the value of the contaminated property. The presence of
hazardous or toxic substances or petroleum products or the failure to properly
remediate contamination may adversely affect our ability to borrow against, sell
or rent an affected property. In addition, applicable environmental laws may
create liens on contaminated sites in favor of the government for damages and
costs it incurs in connection with a contamination. Moreover, if contamination is
discovered on our properties, environmental laws may impose restrictions on
the manner in which property may be used or businesses may be operated, and
these restrictions may result in substantial expenditures or liabilities.
It is our policy to retain independent environmental consultants to conduct
Phase I environmental site assessments and asbestos surveys with respect
to our acquisition of properties. These assessments generally include a visual
inspection of the properties and the surrounding areas, an examination of
current and historical uses of the properties and the surrounding areas and a
review of relevant state, federal and historical documents. However, they do not
always involve invasive techniques such as soil and ground water sampling.
When appropriate, on a property-by-property basis, our general practice is to
have these consultants conduct additional testing. However, even though these
additional assessments may be conducted, there is still the risk that:
• the environmental assessments and updates did not identify all potential
environmental liabilities;
• a prior owner created a material environmental condition that is not known to
us or the independent consultants preparing the assessments;
• new environmental liabilities have developed since the environmental assess-
ments were conducted; and
• future uses or conditions or changes in applicable environmental laws and
regulations could result in environmental liability to us.
In addition, our properties are subject to various federal, state, and local
environmental, health and safety regulatory requirements that address a wide
variety of issues. Noncompliance with these environmental and health and
safety laws and regulations could subject us or our tenants to liability, includ-
ing significant fines or penalties. These liabilities could affect a tenant’s ability
to make rental payments to us. Moreover, changes in laws could increase the
potential costs of compliance with such laws and regulations or increase liability
for noncompliance. This may result in significant unanticipated expenditures or
may otherwise adversely affect our operations, or those of our tenants, which
could in turn have an adverse effect on us.
We cannot assure you that costs or liabilities incurred as a result of environmen-
tal issues will not affect our ability to make distributions to our shareholders or
that such costs, liabilities or other remedial measures will not have an adverse
effect on our financial condition and results of operations.
We face risks associated with security breaches through cyber-attacks,
cyber intrusions, or otherwise, which could materially harm our financial
condition, cash flows and the market price of our common shares.
We face risks associated with security breaches or disruptions, whether through
cyber-attacks or cyber intrusions over the Internet, malware, computer viruses,
attachments to emails, or persons inside our organization. The risk of a secu-
rity breach or disruption, particularly through cyber-attacks or cyber intrusion,
including by computer hackers, foreign governments, and cyber terrorists, has
generally increased as the number, intensity and sophistication of attempted
attacks and intrusions from around the world have increased. In the normal
course of business we and our service providers (including service providers
engaged in providing property management, leasing, accounting and/or payroll
services) collect and retain certain personal information provided by our ten-
ants, employees and vendors. We also rely extensively on computer systems
to process transactions and manage our business. While we and our service
providers employ a variety of data security measures to protect confidential
26
WASHINGTON REIT information on our systems and periodically review and improve our data secu-
rity measures, we cannot assure that we or our service providers will be able
to prevent unauthorized access to this personal information. There can be no
assurance that our efforts to maintain the security and integrity of the informa-
tion we and our service providers collect and our and their computer systems
will be effective or that attempted security breaches or disruptions would not be
successful or damaging. Even the most well protected information, networks,
systems and facilities remain potentially vulnerable because the techniques
used in such attempted security breaches evolve and generally are not recog-
nized until launched against a target, and in some cases are designed not be
detected and, in fact, may not be detected. Accordingly, we and our service
providers may be unable to anticipate these techniques or to implement ade-
quate security barriers or other preventative measures, and thus it is impossible
for us and our service providers to entirely mitigate this risk. A security breach
or other significant disruption involving computer networks and related systems
could adversely impact our financial condition, cash flows and the market price
of our common shares.
We are subject to risks from natural disasters and severe weather which
could increase our operating costs and reduce our cash flow.
Natural disasters and severe weather such as earthquakes, hurricanes or
floods may result in significant damage to our properties. The extent of our
casualty losses and loss in operating income in connection with such events is
a function of the severity of the event and the total amount of exposure in the
affected area. Because our properties are concentrated in one region, a single
catastrophe or destructive weather event affecting a region may have a signif-
icant negative effect on our financial condition and results of operations. As a
result, our operating and financial results may vary significantly from one period
to the next. We are also exposed to risks associated with inclement winter
weather, including increased need for maintenance and repair of our buildings.
In addition, climate change, to the extent it causes changes in weather patterns,
could have effects on our business by increasing the cost of property insurance,
energy and/or snow removal at our properties. As a result, the consequences of
natural disasters, severe weather and climate change could increase our costs
and reduce our cash flow.
We may experience a decline in the fair value of our assets, which may
have a material impact on our financial condition, liquidity and results of
operations and adversely impact the market value of our securities.
A decline in the fair market value of our assets may require us to recognize an
other-than-temporary impairment against such assets under GAAP if we were
to determine that we do not have the ability and intent to hold any assets in
unrealized loss positions to maturity or for a period of time sufficient to allow for
recovery to the amortized cost of such assets. In such event, we would recog-
nize unrealized losses through earnings and write down the amortized cost of
such assets to a new cost basis, based on the fair value of such assets on the
date they are considered to be other-than-temporarily impaired. Such impair-
ment charges reflect non-cash losses at the time of recognition. Subsequent
disposition or sale of such assets could further affect our future losses or
gains, as they are based on the difference between the sale price received and
adjusted amortized cost of such assets at the time of sale, which may adversely
affect our financial condition, liquidity and results of operations. In addition, a
significant economic downturn over a period of time could result in an event or
change in circumstances that results in an impairment in the value of our proper-
ties or our investments in joint ventures. An impairment loss is recognized if the
carrying amount of the asset is not recoverable over its expected holding period
and exceeds its fair value. There can be no assurance that we will not take
charges in the future related to the impairment of our assets or investments. Any
future impairment could have a material adverse effect on our financial condi-
tion, liquidity or results of operations.
Rent control or rent stabilization legislation and other regulatory restric-
tions may limit our ability to increase rents and pass through new or
increased operating costs to our tenants.
Certain states and municipalities, including Washington, DC, have adopted laws
and regulations imposing restrictions on the timing or amount of rent increases
or have imposed regulations relating to low- and moderate-income housing.
Such laws and regulations limit our ability to charge market rents, increase
rents, evict tenants or recover increases in our operating expenses and could
make it more difficult for us to dispose of properties in certain circumstances.
Similarly, compliance procedures associated with rent control statutes and low-
and moderate-income housing regulations could have a negative impact on our
27
FORM 10-K operating costs, and any failure to comply with low- and moderate-income hous-
ing regulations could result in the loss of certain tax benefits and the forfeiture of
rent payments. In addition, such low- and moderate-income housing regulations
often require us to rent a certain number of units at below-market rents, which
has a negative impact on our ability to increase cash flows from our proper-
ties subject to such regulations. Furthermore, such regulations may negatively
impact our ability to attract higher-paying tenants to such properties.
We are dependent on key personnel and the loss of such personnel could
adversely affect our results of operations and financial condition.
not be able to refinance existing debt or that the terms of any refinancing will
not be as favorable as the terms of the existing debt. If principal payments due
at maturity cannot be refinanced, extended or repaid with proceeds from other
sources, such as new equity capital, our cash flow may not be sufficient to repay
all maturing debt in years when significant “balloon” payments come due. In
addition, we may rely on debt to fund a portion of our new investments such as
our acquisition and development activity. There is a risk that we may be unable
to finance these activities on favorable terms or at all. These conditions, which
increase the cost and reduce the availability of debt, may continue or worsen
in the future. If any of these risks were to happen, it would adversely affect our
financial condition and results of operations.
The execution of our investment strategy and management of our operations,
depend to a significant degree on our senior management team. If we are
unable to attract and retain skilled executives, our results of operations and
financial condition could be adversely affected.
Our degree of leverage could limit our ability to obtain additional financ-
ing, affect the market price of our common shares or debt securities or
otherwise adversely affect our financial condition.
Risks Related to Financing
We face risks associated with the use of debt, including refinancing risk.
We rely on borrowings under our credit facilities and offerings of debt securities
to finance acquisitions and development activities and for general corporate pur-
poses. In the recent past, the commercial real estate debt markets have experi-
enced significant volatility due to a number of factors, including the tightening of
underwriting standards by lenders and credit rating agencies and the reported
significant inventory of unsold mortgage-backed securities in the market. The
volatility resulted in investors decreasing the availability of debt financing as well
as increasing the cost of debt financing. We believe that circumstances could
again arise in which we may not be able to obtain debt financing in the future on
favorable terms, or at all. If we were unable to borrow under our credit facilities
or to refinance existing debt financing, our financial condition and results of
operations would likely be adversely affected.
We are subject to the risks normally associated with debt, including the risk that
our cash flow may be insufficient to meet required payments of principal and
interest. We anticipate that only a small portion of the principal of our debt will
be repaid prior to maturity. Therefore, we are likely to need to refinance a signif-
icant portion of our outstanding debt as it matures. There is a risk that we may
On February 24, 2015, our total consolidated debt was approximately $1.2 billion.
Consolidated debt to consolidated market capitalization ratio, which measures
total consolidated debt as a percentage of the aggregate of total consolidated
debt plus the market value of outstanding equity securities, is often used by
analysts to assess leverage for equity REITs such as us. Our market value is cal-
culated using the price per share of our common shares. Using the closing share
price of $28.33 per share of our common shares on February 24, 2015, multiplied
by the number of our common shares, our consolidated debt to total consolidated
market capitalization ratio was approximately 39% as of February 24, 2015.
Our degree of leverage could affect our ability to obtain additional financing for
working capital, capital expenditures, acquisitions, development or other general
corporate purposes. Our senior unsecured debt is currently rated investment
grade by two major rating agencies. However, there can be no assurance that
we will be able to maintain this rating, and in the event our senior debt is down-
graded from its current rating, we would likely incur higher borrowing costs and/
or difficulty in obtaining additional financing. Our degree of leverage could also
make us more vulnerable to a downturn in business or the economy generally.
There is a risk that changes in our debt to market capitalization ratio, which is in
part a function of our share price, or our ratio of indebtedness to other measures
of asset value used by financial analysts, may have an adverse effect on the
market price of our equity or debt securities.
28
WASHINGTON REIT Payments of principal and interest on borrowings may leave us with insufficient
cash resources to operate our properties, fully implement our capital expen-
diture, acquisition and redevelopment activities, or meet the REIT distribu-
tion requirements imposed by the Code. Our level of debt and the limitations
imposed on us by our debt agreements could have significant adverse conse-
quences, including the following:
• require us to dedicate a substantial portion of cash flow from operations to
the payment of principal, and interest on, indebtedness, thereby reducing the
funds available for other purposes;
• make it more difficult for us to borrow additional funds as needed or on favor-
able terms, which could, among other things, adversely affect our ability to
meet operational needs;
• restrict us from making strategic acquisitions, developing properties or exploit-
ing business opportunities;
• force us to dispose of one or more of our properties, possibly on unfavorable
terms (including the possible application of the 100% tax on income from
prohibited transactions or in violation of certain covenants to which we may
be subject);
• subject us to increased sensitivity to interest rate increases;
• make us more vulnerable to economic downturns, adverse industry conditions
or catastrophic external events;
• limit our ability to withstand competitive pressures;
• limit our ability to refinance our indebtedness at maturity or the refinancing
terms may be less favorable than the terms of our original indebtedness;
• reduce our flexibility in planning for or responding to changing business,
industry and economic conditions; and/or
• place us at a competitive disadvantage to competitors that have relatively
less debt than we have.
If any one of these events were to occur, our financial condition, results of
operations, cash flow and trading price of our common shares could be
adversely affected.
Rising interest rates would increase our interest costs which could
adversely affect our cash flow and ability to pay distributions.
We may incur indebtedness that bears interest at variable rates. Accordingly, if
interest rates increase, so will our interest costs, which could adversely affect
our cash flow and our ability to service debt. As a protection against rising
interest rates, we may enter into agreements such as interest rate swaps, caps,
floors and other interest rate exchange contracts. These agreements, however,
increase our risks that other parties to the agreements may not perform or
that the agreements may be unenforceable. In addition, an increase in interest
rates could decrease the amounts third-parties are willing to pay for our assets,
thereby limiting our ability to change our portfolio promptly in response to
changes in economic or other conditions.
Mortgage debt obligations expose us to the possibility of foreclosure,
which could result in the loss of our investment in a property or group of
properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of
property losses because defaults on indebtedness secured by properties may
result in foreclosure actions initiated by lenders and ultimately our loss of the
property securing any loans for which we are in default. Any foreclosure on a
mortgaged property or group of properties could adversely affect the overall
value of our portfolio of properties (or portions thereof). For tax purposes, a
foreclosure of any of our properties that is subject to a nonrecourse mortgage
loan generally would be treated as a sale of the property for a purchase price
equal to the outstanding balance of the debt secured by the mortgage. If the out-
standing balance of the debt secured by the mortgage exceeds our tax basis in
the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds, which could hinder our ability to satisfy the distribu-
tion requirements applicable to REITs under the Code.
Disruptions in the financial markets could affect our ability to obtain
financing or have other adverse effects on us or the market price of our
common shares.
The United States and global equity and credit markets have experienced sig-
nificant price volatility and liquidity disruptions which caused the market prices
29
FORM 10-K of shares to fluctuate substantially and the spreads on prospective debt financ-
ings to widen considerably. These circumstances significantly and negatively
impacted liquidity in the financial markets, making terms for certain financings
less attractive or unavailable. Any disruption in the equity and credit markets
could negatively impact our ability to access additional financing at reasonable
terms or at all. If such disruption were to occur, in the event of a debt financing,
our cost of borrowing in the future would likely be significantly higher than histor-
ical levels. Additionally, in the case of a common equity financing, the disrup-
tions in the financial markets could have a material adverse effect on the market
value of our common shares, potentially requiring us to issue more shares than
we would otherwise have issued with a higher market value for our common
shares. Disruption in the financial markets also could negatively affect our ability
to make acquisitions, undertake new development projects and refinance our
debt. In addition, it could also make it more difficult for us to sell properties and
could adversely affect the price we receive for properties that we do sell, as
prospective buyers experience increased costs of financing and difficulties in
obtaining financing. If economic conditions deteriorate, the ability of lenders to
fulfill their obligations under working capital or other credit facilities that we may
have in the future may be adversely impacted.
Disruptions in the financial markets also could adversely affect many of our
tenants and their businesses, including their ability to pay rents when due and
renew their leases at rates at least as favorable as their current rates. As well,
our ability to attract prospective new tenants in the future could be adversely
affected by disruption in the financial markets. Each of these disruptions could
have adverse effects on us or the market price of our common shares.
Covenants in our debt agreements could adversely affect our
financial condition.
Our credit facilities contain customary restrictions, requirements and other lim-
itations on our ability to incur indebtedness. We must maintain a minimum tan-
gible net worth and certain ratios, including a maximum of total liabilities to total
gross asset value, a maximum of secured indebtedness to gross asset value,
a minimum of quarterly EBITDA to fixed charges, a minimum of unencumbered
asset value to unsecured indebtedness, a minimum of net operating income
from unencumbered properties to unsecured interest expense and a maximum
of permitted investments to gross asset value. Our ability to borrow under our
credit facilities is subject to compliance with our financial and other covenants.
Failure to comply with any of the covenants under our unsecured credit facilities
or other debt instruments could result in a default under one or more of our debt
instruments. In particular, we could suffer a default under one of our secured
debt instruments that could exceed a cross-default threshold under our unse-
cured credit facilities, causing an event of default under the unsecured credit
facilities. Under those circumstances, other sources of capital may not be avail-
able to us or be available only on unattractive terms. In addition, if we breach
covenants in our debt agreements, the lenders can declare a default and, if the
debt is secured, take possession of the property securing the defaulted loan.
Alternatively, even if a secured debt instrument is below the cross-default
threshold for non-recourse secured debt under our unsecured credit facilities,
a default under such secured debt instrument may still cause a cross default
under our unsecured credit facilities because such secured debt instrument
may not qualify as “non-recourse” under the definition in our unsecured credit
facilities. Another possible cross default could occur between our unsecured
credit facilities and our senior unsecured notes. Any of the foregoing default or
cross-default events could cause our lenders to accelerate the timing of pay-
ments and/or prohibit future borrowings, either of which would have a material
adverse effect on our business, operations, financial condition and liquidity.
Risks Related to Our Organizational Structure
Our charter and Maryland law contain provisions that may delay, defer
or prevent a change in control of our company, even if such a change in
control may be in your interest, and as a result may depress the market
price of our common shares.
Provisions of the Maryland General Corporation Law (“MGCL”) may limit a
change in control which could prevent holders of our common shares from prof-
iting as a result of such change in control. These provisions include:
• a provision where a corporation is not permitted to engage in any business
combination with any “interested stockholder,” defined as any holder or affili-
ate of any holder of 10% or more of the corporation’s stock, for a period of five
years after that holder becomes an “interested stockholder,” and
30
WASHINGTON REIT • a provision where the voting rights of “control shares” acquired in a “control
share acquisition,” as defined in the MGCL, may be restricted, such that the
“control shares” have no voting rights, except to the extent approved by a vote
of holders of two-thirds of the common shares entitled to vote on the matter.
Additionally, we are subject to the “business combination” and “unsolicited
takeover” provisions of the MGCL. These provisions may delay, defer, or prevent
a transaction or a change in control that may involve a premium price for holders
of our shares or otherwise be in their best interests. Our bylaws currently pro-
vide that the foregoing provision regarding “control share acquisitions” will not
apply to Washington REIT. However, our board of trustees could, in the future,
modify our bylaws such that the foregoing provision regarding “control share
acquisitions” would be applicable to Washington REIT.
being “closely held” under Section 856(h) of the Code (regardless of whether
the interest is held during the last half of a taxable year) or that would otherwise
cause us to fail to qualify as a REIT, or (b) transferring stock if such transfer
would result in our stock being owned by fewer than 100 persons. The owner-
ship limits imposed under the Code are based upon direct or indirect ownership
by “individuals,” but only during the last half of a tax year. The ownership limits
contained in our charter are based on the ownership at any time by any “per-
son,” which term includes entities and certain groups. These ownership limita-
tions in our charter are common in REIT charters and are intended to provide
added assurance of compliance with the tax law requirements, and to minimize
administrative burdens. However, the ownership limits on our stock also might
delay, defer, prevent, or otherwise inhibit a transaction or a change in control of
our company that might involve a premium price for shares of our stock or other-
wise be in the best interest of our shareholders.
The stock ownership limits imposed by the Code for REITs and imposed
by our charter may restrict our business combination opportunities that
might involve a premium price for our common shares or otherwise be in
the best interest of our shareholders.
Our rights and the rights of our shareholders to take action against our
trustees and officers are limited, which could limit your recourse in the
event of actions that you do not believe are in your best interests.
In order for us to maintain our qualification as a REIT under the Code, not more
than 50% in value of our outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (defined in the Code to include certain entities) at
any time during the last half of each taxable year following our first year. Our
charter authorizes our board of trustees to take the actions that are necessary
or appropriate to preserve our qualification as a REIT. No person may actually or
constructively own more than 9.8% of the aggregate of the outstanding shares
of our common stock by value or by number of shares, whichever is more
restrictive, or 9.8% of the aggregate of the outstanding shares of our capital
stock by value.
Our board of trustees may, in its sole discretion, grant exemptions to the stock
ownership limits, subject to such conditions and the receipt by our board of
trustees of certain representations and undertakings. In addition, our board of
trustees has the authority under our charter to reduce these ownership limits.
In addition to the ownership limits discussed above, our charter also prohibits
any person from (a) beneficially or constructively owning, as determined by
applying certain attribution rules of the Code, our stock that would result in us
Maryland law provides that a trustee has no liability in that capacity if he or she
satisfies his or her duties to us and our shareholders. Under current Maryland
law, our trustees and officers will not have any liability to us or our shareholders
for money damages, except for liability resulting from:
• actual receipt of an improper benefit or profit in money, property or services; or
• a final judgment based upon a finding of active and deliberate dishonesty by
the trustee or officer that was material to the cause of action adjudicated.
In addition, our charter authorizes and our bylaws require us to indemnify our
trustees for actions taken by them in those capacities to the maximum extent
permitted by Maryland law. Our bylaws also authorize us to indemnify our
officers for actions taken by them in those capacities to the maximum extent
permitted by Maryland law. As a result, we and our shareholders may have
more limited rights against our trustees and officers than might otherwise exist.
Accordingly, in the event that actions taken in good faith by any of our trustees
or officers impede the performance of our company, your ability to recover
damages from such trustees or officers will be limited with respect to trustees
and may be limited with respect to officers. In addition, we will be obligated to
advance the defense costs incurred by our trustees and our executive officers,
31
FORM 10-K and may, in the discretion of our board of trustees, advance the defense costs
incurred by our officers, our employees and other agents, in connection with
legal proceedings.
Risks Related to Our Common Shares
We cannot assure you we will continue to pay dividends at current rates.
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, we may have to borrow on our lines of credit to sustain the dividend
rate or reduce our dividend. Our ability to continue to pay dividends on our com-
mon shares at their current rate or to increase our common share dividend rate
will depend on a number of factors, including, among others, the following:
Further issuances of equity securities may be dilutive to current shareholders.
The interests of our existing shareholders could be diluted if additional equity
securities are issued, including to finance future developments and acquisitions,
instead of incurring additional debt. Our ability to execute our business strategy
depends on our access to an appropriate blend of debt financing, including
unsecured lines of credit and other forms of secured and unsecured debt and
equity financing.
The market value of our securities can be adversely affected by
many factors.
As with any public company, a number of factors may adversely influence the
public market price of our common shares. These factors include:
• our future financial condition and results of operations;
• level of institutional interest in us;
• real estate market conditions in the Washington metro region;
• perceived attractiveness of investment in us, in comparison to other REITs;
• the performance of lease terms by tenants;
• attractiveness of securities of REITs in comparison to other asset classes
• the terms of our loan covenants; and
• our ability to acquire, finance, develop or redevelop and lease additional prop-
erties at attractive rates.
Our Board of Trustees considers, among other factors, trends in our levels
of funds from operations, together with associated recurring capital improve-
ments, tenant improvements, leasing commissions and incentives, and adjust-
ments to straight-line rents to reflect cash rents received. This level has trended
lower in recent years due to the recent economic downturn and uncertainty
with the business and leasing environment in the Washington metro region.
We reduced our dividend rate in 2012, and if such trend were to continue for
a sustained period of time, our board of trustees could determine to further
reduce our dividend rate. If we do not maintain or increase the dividend rate on
our common shares in the future, it could have an adverse effect on the market
price of our common shares.
taking into account, among other things, that a substantial portion of REITs’
dividends are taxed as ordinary income;
• our financial condition and performance;
• the market’s perception of our growth potential and potential future
cash dividends;
• investor confidence in the stock and bond markets generally;
• national economic conditions and general stock and bond market conditions;
• government action or regulation, including changes in tax law;
• increases in market interest rates, which may lead investors to expect a higher
annual yield from our distributions in relation to the price of our shares;
• changes in federal tax laws;
• changes in our credit ratings; and
• any negative change in the level of our dividend or the partial payment thereof
in common shares.
32
WASHINGTON REIT Risks Related to our Status as a REIT
Loss of our tax status as a REIT would have significant adverse conse-
quences to us and the value of our common shares.
We believe that we qualify as a REIT and intend to continue to operate in a
manner that will allow us to continue to qualify as a REIT. However, we cannot
assure you that we are qualified as such, or that we will remain qualified as such
in the future. This is because qualification as a REIT involves the application of
highly technical and complex provisions of the Code which include:
• maintaining ownership of specified minimum levels of real estate
related assets;
• generating specified minimum levels of real estate related income;
• maintaining certain diversity of ownership requirements with respect to
our shares; and
• distributing at least 90% of our taxable income on an annual basis.
The distribution requirement noted above could adversely affect our ability to
use earnings for improvements or acquisitions because funds distributed to
shareholders will not be available for capital improvements to existing properties
or for acquiring additional properties.
Only limited judicial and administrative interpretations of the REIT rules exist.
In addition, qualification as a REIT involves the determination of various factual
matters and circumstances not entirely within our control. Future legislation, new
regulations, administrative interpretations or court decisions may significantly
change the tax laws or the application of the tax laws with respect to qualifica-
tion as a REIT for federal income tax purposes or the federal income tax conse-
quences of such qualification.
If we fail to qualify as a REIT, we could face serious tax consequences that
could substantially reduce our funds available for payment of dividends for each
of the years involved because:
• we would be subject to federal income tax at regular corporate rates,
without any deduction for dividends paid to shareholders in computing
our taxable income;
• we also could be subject to the federal alternative minimum tax and possibly
increased state and local taxes; and
• unless we are entitled to relief under statutory provisions, we could not elect
to be subject to tax as a REIT for four taxable years following the year during
which we are disqualified.
This treatment would reduce net earnings available for investment or distribu-
tion to shareholders because of the additional tax liability for the year (or years)
involved. In addition, if we fail to qualify as a REIT, we would no longer be
required to pay dividends. To the extent that distributions to shareholders had
been made based on our qualifying as a REIT, we might be required to borrow
funds or to liquidate certain of our investments to pay the applicable tax. As
a result of these factors, our failure to qualify as a REIT could have a material
adverse impact on our results of operations, financial condition and liquidity. If
we fail to qualify as a REIT but are eligible for certain relief provisions, then we
may retain our status as a REIT but may be required to pay a penalty tax, which
could be substantial.
Complying with the REIT requirements may cause us to forego and/or
liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests
annually. In addition, we must ensure that, at the end of each calendar quar-
ter, at least 75% of the value of our total assets consists of cash, cash items,
government securities and qualified REIT real estate assets, including certain
mortgage loans. The remainder of our investment in securities (other than
government securities and qualified REIT real estate assets) generally cannot
include more than 10% of the outstanding voting securities of any one issuer or
more than 10% of the total value of the outstanding securities of any one issuer.
In addition, in general, no more than 5% of the value of our assets (other than
government securities and qualified real estate assets) can consist of the secu-
rities of any one issuer, and no more than 25% of the value of our total securities
can be represented by securities of one or more TRS’s. If we fail to comply with
these asset requirements at the end of any calendar quarter, we must correct
the failure within 30 days after the end of the calendar quarter or qualify for cer-
tain statutory relief provisions to avoid losing our REIT qualification and suffering
adverse tax consequences.
33
FORM 10-K To meet these tests, we may be required to take or forgo taking actions that we
would otherwise consider advantageous. For instance, in order to satisfy the
gross income or asset tests applicable to REITs under the Code, we may be
required to forego investments that we otherwise would make. Furthermore, we
may be required to liquidate from our portfolio (or to contribute to a TRS) other-
wise attractive investments. In addition, we may be required to make distribu-
tions to shareholders at disadvantageous times or when we do not have funds
readily available for distribution. These actions could have the effect of reducing
our income and amounts available for distribution to our shareholders. Thus,
compliance with the REIT requirements may hinder our ability to make, and, in
certain cases, maintain ownership of, certain attractive investments.
The requirements necessary to maintain our REIT status limit our ability
to earn fee income at the REIT level, which causes us to conduct fee-
generating activities through a TRS.
The REIT provisions of the Code limit our ability to earn fee income from joint
ventures and third parties. Our aggregate gross income from fees and certain
other non-qualifying sources cannot exceed 5% of our annual gross income. As
a result, our ability to increase the amount of fee income we earn at the REIT
level is limited and, therefore, we may conduct fee-generating activities through
a TRS. Any fee income we earn through a TRS is subject to U.S. federal, state,
and local income tax at regular corporate rates, which reduces our cash avail-
able for distribution to shareholders.
Our ability to own stock and securities of TRS’s is limited and our trans-
actions with our TRS will cause us to be subject to a 100% penalty tax on
certain income or deductions if those transactions are not conducted on
arm’s length terms.
A REIT may own up to 100% of the stock of one or more TRS’s. A TRS may hold
assets and earn income that would not be qualifying assets or income if held or
earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to
treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly
owns more than 35% of the voting power or value of the stock will automatically
be treated as a TRS. Overall, no more than 25% of the value of a REIT’s assets
may consist of stock or securities of one or more TRS’s. In addition, the rules
applicable to TRS’s limit the deductibility of interest paid or accrued by a TRS
to its parent REIT to assure that the TRS is subject to an appropriate level of
corporate taxation. The rules also impose a 100% excise tax on certain transac-
tions involving a TRS that are not conducted on an arm’s length basis.
Our TRS’s will pay federal, state and local income tax on its taxable income.
The after-tax net income of our TRS’s will be available for distribution to us but
generally is not required to be distributed. We believe that the aggregate value
of the stock and securities of our TRS’s is less than 25% of the value of our total
assets (including the stock and securities of our TRS). Furthermore, we monitor
the value of our respective investments in our TRS’s for the purpose of ensuring
compliance with the ownership limitations applicable to TRS’s. We scrutinize
all of our transactions involving our TRS’s to ensure that they are entered into
on arm’s length terms to avoid incurring the 100% excise tax described above.
There can be no assurance, however, that we will be able to comply with the
25% limitation discussed above or avoid application of the 100% excise tax
discussed above.
Complying with REIT requirements may limit our ability to hedge effec-
tively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our assets and
operations. Under these provisions, income that we generate from transactions
intended to hedge our interest rate risk generally will be excluded from gross
income for purposes of the 75% and 95% gross income tests applicable to
REITs if the instrument hedges interest rate or foreign currency risk on liabili-
ties used to carry or acquire real estate assets or certain other types of foreign
currency risk, and such instrument is properly identified. Income from hedging
transactions that does not meet these requirements will generally constitute
non-qualifying income for purposes of both the REIT 75% and 95% gross
income tests. As a result of these rules, we may have to limit our use of hedging
techniques that might otherwise be advantageous or implement those hedges
through a TRS. This could increase the cost of our hedging activities because
our TRS would be subject to tax on gains or expose us to greater risks asso-
ciated with changes in interest rates than we would otherwise want to bear. In
addition, losses in our TRS will generally not provide any tax benefit, except for
being carried forward against future taxable income in the TRS.
34
WASHINGTON REIT Dividends payable by REITs do not qualify for the reduced tax rates avail-
able for some dividends.
The maximum tax rate applicable to income from “qualified dividends” payable
to U.S. shareholders that are individuals, trusts and estates is 20%. Dividends
payable by REITs, however, generally are not eligible for the reduced rates
and will continue to be subject to tax at rates applicable to ordinary income.
Although this does not adversely affect the taxation of REITs or dividends pay-
able by REITs, the more favorable rates applicable to regular corporate quali-
fied dividends could cause investors who are individuals, trusts and estates to
perceive investments in REITs to be relatively less attractive than investments in
the shares of non-REIT corporations that pay dividends, which could adversely
affect the value of the stock of REITs, including shares of our common stock.
The tax imposed on REITs engaging in prohibited transactions may limit
our ability to engage in transactions that would be treated as sales for
federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty
tax. In general, prohibited transactions are sales or other dispositions of prop-
erty, other than foreclosure property, held primarily for sale to customers in the
ordinary course of business. Although we do not intend to hold any properties
that would be characterized as held for sale to customers in the ordinary course
of our business, unless a sale or disposition qualifies under certain statutory
safe harbors, such characterization is a factual determination and no guarantee
can be given that the IRS would agree with our characterization of our properties
or that we will be able to make use of the otherwise available safe harbors.
The REIT distribution requirements could require us to borrow funds
during unfavorable market conditions or subject us to tax, which would
reduce the cash available for distribution to our shareholders.
In order to qualify as a REIT, we generally must distribute to our shareholders,
on an annual basis, at least 90% of our REIT taxable income, determined with-
out regard to the deduction for dividends paid and excluding net capital gains.
In addition, we will be subject to federal income tax at regular corporate rates to
the extent that we distribute less than 100% of our net taxable income (including
net capital gains) and will be subject to a 4% nondeductible excise tax on the
amount by which our distributions in any calendar year are less than a minimum
amount specified under federal income tax laws. We intend to distribute our net
income to our shareholders in a manner intended to satisfy the REIT 90% dis-
tribution requirement and to avoid federal income tax and the 4% nondeductible
excise tax.
In addition, from time to time our taxable income may exceed our net income
as determined by GAAP. This may occur, for instance, because realized capital
losses are deducted in determining our GAAP net income, but may not be
deductible in computing our taxable income. In addition, we may incur non-
deductible capital expenditures or be required to make debt or amortization
payments. As a result of the foregoing, we may generate less cash flow than
taxable income in a particular year and we may incur federal income tax and the
4% nondeductible excise tax on that income if we do not distribute such income
to shareholders in that year. In that event, we may be required to (i) use cash
reserves, (ii) incur debt or liquidate assets at rates or times that we regard as
unfavorable, (iii) sell assets in adverse market conditions, (iv) distribute amounts
that would otherwise be invested in future acquisitions, capital expenditures or
repayment of debt, or (v) make a taxable distribution of our shares as part of a
distribution in which shareholders may elect to receive our shares or (subject to
a limit measured as a percentage of the total distribution) cash in order to satisfy
the REIT 90% distribution requirement and to avoid federal income tax and the
4% nondeductible excise tax in that year. These alternatives could increase our
costs or reduce our equity. Thus, compliance with the REIT requirements may
hinder our ability to grow, which could adversely affect our business, financial
condition and results of operations.
The ability of our board of trustees to revoke our REIT qualification
without shareholder approval may cause adverse consequences to
our shareholders.
Our charter provides that our board of trustees may revoke or otherwise termi-
nate our REIT election, without the approval of our shareholders, if it determines
that it is no longer in our best interest to continue to qualify as a REIT. If we
cease to be a REIT, we will not be allowed a deduction for dividends paid to
shareholders in computing our taxable income, will be subject to U.S. federal
income tax at regular corporate rates and state and local taxes, and generally
would no longer be required to distribute any of our net taxable income to our
35
FORM 10-K shareholders, which may have adverse consequences on our total return to
our shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Even if we qualify as a REIT, we may face other tax liabilities that reduce
our cash flow.
Even if we qualify for taxation as a REIT, we may be subject to certain federal,
state and local taxes on our income, property or net worth, including taxes on
any undistributed income, tax on income from some activities conducted as a
result of a foreclosure, and state or local income, property and transfer taxes.
In addition, we could, in certain circumstances, be required to pay an excise or
penalty tax (which could be significant in amount) in order to utilize one or more
relief provisions under the Code to maintain our qualification as a REIT. Any of
these taxes would decrease cash available for the payment of our debt obliga-
tions and distributions to shareholders. Our TRS’s generally will be subject to
U.S. federal corporate income tax on their net taxable income.
There is a risk of changes in the tax law applicable to REITs.
The Internal Revenue Service, the United States Treasury Department and
Congress frequently review federal income tax legislation, regulations and other
guidance. We cannot predict whether, when or to what extent new federal tax
laws, regulations, interpretations or rulings will be adopted. Any legislative action
may prospectively or retroactively modify our tax treatment and, therefore, may
adversely affect taxation of us and/or our investors.
ITEM 2. PROPERTIES
The schedule on the following pages lists our real estate investment portfolio
as of December 31, 2014, which consisted of 56 properties and land held
for development.
As of December 31, 2014, the percent leased is (i) for commercial properties,
the percentage of net rentable area for which fully executed leases exist and
may include signed leases for space not yet occupied by the tenant, and (ii) for
multifamily properties, the percentage of units leased.
Cost information is included in Schedule III to our financial statements included
in this Annual Report on Form 10-K.
36
WASHINGTON REIT Location
Year
Acquired
Year Constructed/
Renovated
Net Rentable
Square Feet(1)
Percent Leased, as of
December 31, 2014
Schedule of Properties
Properties
Office Buildings
1901 Pennsylvania Avenue
51 Monroe Street
515 King Street
6110 Executive Boulevard
1220 19thStreet
1600 Wilson Boulevard
Washington, D.C.
Rockville, MD
Alexandria, VA
Rockville, MD
Washington, D.C.
Arlington, VA
Silverline Center (formerly 7900 Westpark Drive)
Tysons, VA
600 Jefferson Plaza
Wayne Plaza
Courthouse Square
One Central Plaza
1776 G Street
West Gude Drive
Monument II
2000 M Street
2445 M Street
925 Corporate Drive
1000 Corporate Drive
1140 Connecticut Avenue
1227 25th Street
Braddock Metro Center
John Marshall II
Fairgate at Ballston
Army Navy Club Building
1775 Eye Street, NW
Subtotal
Retail Centers
Takoma Park
Westminster
Concord Centre
Wheaton Park
Rockville, MD
Silver Spring, MD
Alexandria, VA
Rockville, MD
Washington, D.C.
Rockville, MD
Herndon, VA
Washington, D.C.
Washington, D.C.
Stafford, VA
Stafford, VA
Washington, D.C.
Washington, D.C.
Alexandria, VA
Tysons, VA
Arlington, VA
Washington, D.C.
Washington, D.C.
Takoma Park, MD
Westminster, MD
Springfield, VA
Wheaton, MD
1977
1979
1992
1995
1995
1997
1997
1999
2000
2000
2001
2003
2006
2007
2007
2008
2010
2010
2011
2011
2011
2011
2012
2014
2014
1963
1972
1973
1977
1960
1975
1966
1971
1976
1973
1972/1986/1999/ 2014
1985
1970
1979
1974
1979
1984/1986/1988
2000
1971
1986
2007
2009
1966
1988
1985
1996/2010
1988
1912/1987
1964
1962
1969
1960
1967
101,000
221,000
75,000
201,000
103,000
166,000
526,000
113,000
99,000
116,000
267,000
263,000
276,000
208,000
230,000
290,000
133,000
136,000
183,000
135,000
353,000
223,000
142,000
108,000
185,000
4,853,000
51,000
150,000
76,000
74,000
97%
99%
92%
87%
94%
82%
60%
90%
83%
95%
96%
100%
84%
86%
100%
100%
93%
89%
94%
95%
97%
100%
83%
97%
65%
89%
100%
96%
82%
100%
37
FORM 10-K Properties
Bradlee Shopping Center
Chevy Chase Metro Plaza
Montgomery Village Center
Shoppes of Foxchase
Frederick County Square
800 S. Washington Street
Centre at Hagerstown
Frederick Crossing
Randolph Shopping Center
Montrose Shopping Center
Gateway Overlook
Olney Village Center
Location
Alexandria, VA
Washington, D.C.
Gaithersburg, MD
Alexandria, VA
Frederick, MD
Alexandria, VA
Hagerstown, MD
Frederick, MD
Rockville, MD
Rockville, MD
Columbia, MD
Olney, MD
Spring Valley Retail Center
Washington, D.C.
Subtotal
Multifamily Buildings / #of Units
3801 Connecticut Avenue / 307
Roosevelt Towers / 191
Country Club Towers / 227
Park Adams / 200
Munson Hill Towers / 279
The Ashby at McLean / 256
Walker House Apartments / 212
Bethesda Hill Apartments / 195
Bennett Park / 224
Clayborne / 74
Kenmore / 374
The Paramount / 135
Yale West / 216
The Maxwell(2) / 163
Subtotal / 3,053
TOTAL
Washington, D.C.
Falls Church, VA
Arlington, VA
Arlington, VA
Falls Church, VA
McLean, VA
Gaithersburg, MD
Bethesda, MD
Arlington, VA
Alexandria, VA
Washington, D.C.
Arlington, VA
Washington, D.C.
Arlington, VA
Year
Acquired
1984
1985
1992
1994
1995
1998/2003
2002
2005
2006
2006
2010
2011
2014
1963
1965
1969
1969
1970
1996
1996
1997
2007
2008
2008
2013
2014
2014
Year Constructed/
Renovated
Net Rentable
Square Feet(1)
Percent Leased, as of
December 31, 2014
1955
1975
1969
1960/2006
1973
1955/1959
2000
1999/2003
1972
1970
2007
1979/2003
1941/1950
1951
1964
1965
1959
1963
1982
1971/2003
1986
2007
2008
1948
1984
2011
2014
171,000
49,000
197,000
134,000
227,000
47,000
332,000
295,000
82,000
145,000
220,000
199,000
75,000
2,524,000
179,000
170,000
159,000
173,000
258,000
274,000
157,000
225,000
214,000
60,000
268,000
141,000
173,000
143,000
2,594,000
9,971,000
99%
100%
78%
97%
97%
98%
98%
99%
64%
96%
100%
98%
93%
95%
97%
97%
97%
98%
97%
97%
95%
96%
99%
93%
94%
93%
95%
N/A
96%
(1) Multifamily buildings are presented in gross square feet.
(2) We substantially completed major construction activities at The Maxwell by the end of 2014. However, as of December 31, 2014, only two of six residential floors were available for occupancy. Therefore, we will not include The
Maxwell’s units in our leasing and occupancy calculations until the first quarter of 2015.
38
WASHINGTON REIT ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
N/A.
39
FORM 10-K PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our shares trade on the New York Stock Exchange. As of February 24, 2015,
there are 4,447 shareholders of record.
The high and low sales price for our shares for 2014 and 2013, by quarter, and
the amount of dividends we paid per share are as follows:
We have historically paid dividends on a quarterly basis. The maintenance of
our dividend level is subject to various factors reviewed by the Board of Trustees
in its discretion. These factors include our results of operations, the availability
of cash and the REIT distribution requirements, which require at least 90% of
our REIT taxable income to be distributed to shareholders on an annual basis.
For further discussion, please refer to:
• “Item 7—Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources—Dividends,” and
• “Item 1A—Risk Factors—Risks Related to Our Common Shares—We cannot
assure you that we will continue to pay dividends at current rates.”
Quarterly Share Price Range
High
Low
During the period covered by this report, we did not sell equity securities without
registration under the Securities Act.
$28.48
$28.44
$26.95
$25.69
$27.20
$28.76
$30.58
$28.85
$25.35
$25.33
$23.41
$22.30
$22.48
$24.00
$25.05
$26.41
Quarter
2014
Fourth
Third
Second
First
2013
Fourth
Third
Second
First
Dividends
Per Share
0.30000
0.30000
0.30000
0.30000
0.30000
0.30000
0.30000
0.30000
40
WASHINGTON REIT A summary of our repurchases of shares of our common stock for the three months ended December 31, 2014 was as follows:
Period
October 1–October 31, 2014
November 1–November 30, 2014
December 1–December 31, 2014
Total
Total Number of
Shares Purchased(1)
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
Maximum Number
(or Approximate Dollar Value)
of Shares that May Yet
be Purchased
2,541
4,325
14,095
20,961
$25.66
26.46
27.66
27.17
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Represents restricted shares surrendered by employees to Washington REIT to satisfy such employees’ applicable statutory minimum tax withholding obligations in connection with the vesting of restricted shares.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data on a historical basis, which has been revised for properties disposed of or classified as held for sale (see
note 3 to the consolidated financial statements). The following data should be read in conjunction with our financial statements and notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.
(in thousands, except per share data)
Real estate rental revenue
Income (loss) from continuing operations
Discontinued operations:
Income from operations of properties sold or held for sale
Gain on sale of real estate
Net income
Net income attributable to the controlling interests
Income (loss) from continuing operations attributable to the controlling
interests per share—diluted
Net income attributable to the controlling interests per share—diluted
Total assets
Lines of credit payable
Mortgage notes payable
Notes payable
Shareholders’ equity
Cash dividends paid
Cash dividends declared and paid per share
2014
2013
2012
2011
2010
$ 288,637
$ 5,070
$ 546
$ 105,985
$ 111,601
$ 111,639
$ 0.08
$ 1.67
$2,113,707
$ 50,000
$ 418,525
$ 747,208
$ 819,555
$ 80,277
$ 1.20
$ 263,024
$ 254,794
$ 234,733
$ 204,219
$ (193)
$ 7,768
$ (14,389)
$ (10,874)
$ 15,395
$ 22,144
$ 37,346
$ 37,346
$ 10,816
$5,124
$ 23,414
$ 97,491
$ 23,708
$ 105,378
$ 23,708
$ 104,884
$ 26,834
$ 21,599
$ 37,559
$ 37,426
$ —
$ 0.55
$ 0.11
$ 0.35
$ (0.22)
$ (0.17)
$ 1.58
$ 0.60
$1,975,493
$2,124,376
$2,120,758
$2,167,881
$ —
$ —
$ 99,000
$ 100,000
$ 294,671
$ 319,025
$ 342,989
$ 265,757
$ 846,703
$ 906,190
$ 657,470
$ 753,587
$ 754,959
$ 792,057
$ 859,044
$ 857,080
$ 80,104
$ 97,734
$ 115,045
$ 108,949
$ 1.20
$ 1.47
$ 1.74
$ 1.73
41
FORM 10-K For purposes of evaluating comparative operating performance, we categorize
our properties as “same-store,” “non-same-store” or discontinued operations. A
“same-store” property is one that was owned for the entirety of the periods being
evaluated and excludes properties under redevelopment or development and
properties purchased or sold at any time during the periods being compared. A
“non-same-store” property is one that was acquired, under redevelopment or
development, or placed into service during either of the periods being evaluated.
We define redevelopment properties as those for which we expect to spend
significant development and construction costs on existing or acquired buildings
pursuant to a formal plan which has a current impact on operating results, occu-
pancy and the ability to lease space with the intended result of a higher eco-
nomic return on the property. Properties under redevelopment or development
are included within the non-same-store properties beginning in the period during
which redevelopment or development activities commence. Redevelopment and
development properties are included in the same-store pool upon completion of
the redevelopment or development, and the earlier of achieving 90% occupancy
or two years after completion.
Overview
Business
As described in “Item 1—Business,” our business consists of the ownership and
operation of income-producing real property in the greater Washington metro
region. We own a diversified portfolio of office buildings, multifamily buildings
and retail centers. Over the past three years, we have sold our medical office
segment and reinvested a portion of the sales proceeds into properties that fit
our strategy of owning properties inside the Washington metro region’s Beltway,
near major transportation nodes and in areas with strong employment drivers
and superior growth demographics. We intend to continue this strategy in 2015.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We provide 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, operating results, investment activity
and capital requirements, and summary of our significant transactions to pro-
vide context for the remainder of MD&A.
• Critical Accounting Policies and Estimates. Descriptions of accounting policies
that reflect significant judgments and estimates used in the preparation of our
consolidated financial statements.
• Results of Operations. Discussion of our financial results comparing 2014 to
2013 and comparing 2013 to 2012.
• Liquidity and Capital Resources. Discussion of our financial condition and
analysis of changes in our capital structure and cash flows.
When evaluating our financial condition and operating performance, we focus on
the following financial and non-financial indicators:
• Net operating income (“NOI”), calculated as real estate rental revenue less
real estate expenses excluding depreciation and amortization and general
and administrative expenses. NOI is a non-GAAP supplemental measure to
net income.
• Funds From Operations (“FFO”), calculated as set forth below under the
caption “Funds from Operations.” FFO is a non-GAAP supplemental measure
to net income.
• Occupancy, calculated as occupied square footage as a percentage of total
square footage as of the last day of that period.
• Leased percentage, calculated as the percentage of available physical net
rentable area leased for our commercial segments and percentage of apart-
ments leased for our multifamily segment.
• Rental rates.
• Leasing activity, including new leases, renewals and expirations.
42
WASHINGTON REIT Operating Results
Real estate rental revenue, NOI, net income attributable to the controlling inter-
ests and FFO for the years ended December 31, 2014 and 2013 were as follows
(in thousands):
Real estate rental revenue
NOI(1)
Net income attributable to the
controlling interests
FFO(2)
Year Ended December 31,
2014
2013
$288,637
$184,942
$263,024
$169,731
Change
$ 25,613
$ 15,211
$111,639
$101,057
$ 37,346
$113,103
$ 74,293
$(12,046)
(1) See pages 50 and 55 of the MD&A for reconciliations of NOI to net income.
(2) See page 65 of the MD&A for reconciliations of FFO to net income.
NOI increased by $15.2 million primarily due to acquisitions ($10.9 million). NOI
from same-store properties increased by $8.6 million, as higher occupancy
($6.9 million) and lower net provisions for bad debt ($2.4 million) were partially
offset by higher real estate tax assessments ($1.0 million).
Net income attributable to the controlling interests increased by $74.3 million
primarily due to higher gains on sale of real estate ($84.4 million), partially offset
by loss of income from properties included in our former medical office segment,
which was sold in stages during the fourth quarter of 2013 and the first quarter
of 2014. Primarily due to this disposition, income from discontinued operations
decreased by $14.8 million. This lost income has been partially replaced by
income from acquisitions made using the proceeds from the sale of our medical
office segment.
The $12.0 million decrease in FFO primarily reflects loss of income from proper-
ties included in our former medical office segment.
As described in “Item 1—Business,” under “Washington Metro Region Real
Estate Markets,” we anticipate continued market challenges in leasing vacant
space during 2015. For example, when our renovation of Silverline Center is
substantially completed during Q1 2015, we will have approximately 200,000
square feet of office space to lease up at this property. We also anticipate
circumstances where rents on new or renewal leases will be lower than the
existing portfolio rents, putting further downward pressure on NOI from same-
store properties.
Investment Activity
We completed the disposition of our Medical Office Portfolio during the first
quarter of 2014, resulting in a gain on sale of real estate of $106.0 million.
We acquired two office buildings, one retail center and one multifamily building
during 2014, all located in Washington, DC. We also substantially completed
construction on The Maxwell, a multifamily development in Arlington, Virginia at
the end of 2014. These transactions are consistent with our current strategy.
Capital Requirements
We extinguished the remaining $100.0 million of our 5.25% unsecured notes on
their maturity date in January 2014. We assumed mortgage notes with remaining
principal balances of $48.2 million and $52.7 million with our acquisitions of Yale
West and The Army Navy Club Building, respectively. We have $150.0 million of
5.35% unsecured notes that mature in May 2015. As of February 24, 2015, our
unsecured lines of credit have a combined borrowing capacity of $434.5 million.
Significant Transactions
We summarize below our significant transactions during the two years ended
December 31, 2014:
2014
• The acquisition of Yale West, a 216-unit multifamily property in Washington,
DC, for a contract purchase price of $73.0 million. We assumed a $48.2 mil-
lion mortgage with this acquisition. We incurred $1.8 million of acquisition
costs related to this transaction.
• The acquisition of The Army Navy Club Building, a 108,000 square foot office
property in Washington, DC, for a contract purchase price of $79.0 million. We
assumed a $52.7 million mortgage with this acquisition. We incurred $1.4 mil-
lion of acquisition costs with this transaction.
• The acquisition of 1775 Eye Street, NW, a 185,000 square foot office prop-
erty in Washington, DC, for a contract purchase price of $104.5 million. We
incurred $1.7 million of acquisition costs with this transaction.
43
FORM 10-K • The acquisition of Spring Valley Retail Center, a 75,000 square foot retail
property in Washington, DC, for a contract purchase price of $40.5 million.
We incurred $0.8 million of acquisition costs with this transaction.
• The execution of new and renewal leases for 1.4 million square feet of
commercial space with an average rental rate increase of 9.5% over
expiring leases.
2013
• The acquisition of The Paramount, a multifamily property in Arlington, Virginia
with 135 units and 3,600 square feet of retail space, for a contract purchase
price of $48.2 million. We incurred $0.3 million in acquisition costs related to
this transaction.
• The execution of four separate contracts with a single buyer for the sale of
the entire medical office segment, consisting of 17 medical office assets,
and two office assets, 6565 Arlington Boulevard and Woodholme Center
(both of which have significant medical office tenancy), encompassing in total
approximately 1.5 million square feet. The assets sold also included land held
for development at 4661 Kenmore Avenue. The sales prices under the four
agreements aggregated to $500.8 million. Purchase and Sale Agreement
#1 ($303.4 million of the aggregate sales price) and Purchase and Sale
Agreement #2 ($3.8 million of the aggregate sales price) closed in November
2013, resulting in a gain on sale of real estate of $18.9 million. Purchase and
Sale Agreement #3 ($79.0 million of the aggregate sales price) and Purchase
and Sale Agreement #4 ($114.6 million of the aggregate sales price) closed in
January 2014, resulting in a gain on sale of $106.0 million.
• The disposition of the Atrium Building, a 79,000 square foot office build-
ing, for a contract sales price of $15.8 million, resulting in a gain on sale of
$3.2 million.
• The execution of new and renewal leases for 1.6 million square feet of com-
mercial space, excluding leases at properties classified as sold or held for
sale, with an average rental rate increase of 10.2% over expiring leases.
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 GAAP. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We evaluate these estimates on an on-going
basis, including those related to estimated useful lives of real estate assets,
estimated fair value of acquired leases, cost reimbursement income, bad debts,
contingencies and litigation. We base the estimates on historical experience and
on various other assumptions that we believe to be reasonable under the circum-
stances, the results of which form the basis for making judgments about the carry-
ing values of assets and liabilities that are not readily apparent from other sources.
We cannot assure you that actual results will not differ from those estimates.
We believe the following accounting estimates are the most critical to aid in fully
understanding our reported financial results, and they require our most difficult,
subjective or complex judgments, resulting from the need to make estimates
about the effect of matters that are inherently uncertain.
Allowance for Doubtful Accounts
We recognize rental income and rental abatements from our multifamily and
commercial leases when earned on a straight-line basis over the lease term.
We record a provision for losses on accounts receivable equal to the estimated
uncollectible amounts. We base this estimate on our historical experience and a
monthly review of the current status of our receivables. We consider factors such
as the age of the receivable, the payment history of our tenants and our assess-
ment of our tenants’ ability to perform under their lease obligations, among other
things. In addition to rents due currently, accounts receivable include amounts
representing minimum rental income accrued on a straight-line basis to be paid
by tenants over the remaining term of their respective leases. Our estimate of
uncollectible accounts is subject to revision as these factors change and is sensi-
tive to the impact of economic and market conditions on tenants.
Accounting for Real Estate Acquisitions
We record acquired or assumed assets, including physical assets and in-place
leases, and liabilities, based on their fair values. We determine the estimated fair
values of the assets and liabilities in accordance with current GAAP fair value
provisions. We determine the fair values of acquired buildings on an “as-if-va-
cant” basis considering a variety of factors, including the replacement cost of
the property, estimated rental and absorption rates, estimated future cash flows
and valuation assumptions consistent with current market conditions. We deter-
mine the fair value of land acquired based on comparisons to similar properties
that have been recently marketed for sale or sold.
44
WASHINGTON REIT The fair value of in-place leases consists of the following components: (a) the
estimated cost to us to replace the leases, including foregone rents during the
period of finding a new tenant and foregone recovery of tenant pass-throughs
(referred to as “absorption cost”); (b) the estimated cost of tenant improvements,
and other direct costs associated with obtaining a new tenant (referred to as
“tenant origination cost”); (c) estimated leasing commissions associated with
obtaining a new tenant (referred to as “leasing commissions”); (d) the above/at/
below market cash flow of the leases, determined by comparing the projected
cash flows of the leases in place, including consideration of renewal options, to
projected cash flows of comparable market-rate leases (referred to as “net lease
intangible”); and (e) the value, if any, of customer relationships, determined based
on our evaluation of the specific characteristics of each tenant’s lease and our
overall relationship with the tenant (referred to as “customer relationship value”).
We discount the amounts used to calculate net lease intangibles using an inter-
est rate which reflects the risks associated with the leases acquired. We include
tenant origination costs in income producing property on our balance sheet and
amortize the tenant origination costs as depreciation expense on a straight-line
basis over the useful life of the asset, which is typically the remaining life of the
underlying leases. We classify leasing commissions and absorption costs as
other assets and amortize leasing commissions and absorption costs as amor-
tization expense on a straight-line basis over the remaining life of the underlying
leases. We classify above market net lease intangible assets as other assets
and amortize them on a straight-line basis as a decrease to real estate rental
revenue over the remaining term of the underlying leases. We classify below
market net lease intangible liabilities as other liabilities and amortize them on a
straight-line basis as an increase to real estate rental revenue over the remain-
ing term of the underlying leases. If any of the fair value of below market lease
intangibles includes fair value associated with a renewal option, such amounts
are not amortized until the renewal option is executed, else the related value is
expensed at that time. Should a tenant terminate its lease, we accelerate the
amortization of the unamortized portion of the tenant origination cost (if it has
no future value), leasing commissions, absorption costs and net lease intangible
associated with that lease over its new shorter term.
Capitalized Interest
We capitalize interest costs incurred on borrowing obligations while qualifying
assets are being readied for their intended use. We amortize capitalized interest
over the useful life of the related underlying assets upon those assets being
placed into service.
Real Estate Impairment
We recognize impairment losses on long-lived assets used in operations, devel-
opment assets or land held for future development, if indicators of impairment are
present and the net undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount and estimated undiscounted
cash flows associated with future development expenditures. If such carrying
amount is in excess of the estimated cash flows from the operation and disposal
of the property, we would recognize an impairment loss equivalent to an amount
required to adjust the carrying amount to the estimated fair value. Assets held for
sale are recorded at the lower of cost or fair value less costs to sell.
Stock Based Compensation
We recognize compensation expense for service-based share awards ratably over
the period from the service inception date through the vesting period based on the
fair market value of the shares on the date of grant. We initially measure compen-
sation expense for awards with performance conditions at fair value at the service
inception date based on probability of payout, and we remeasure compensation
expense at subsequent reporting dates until all of the award’s key terms and condi-
tions are known and the grant date is established. We amortize awards with perfor-
mance conditions using the graded expense method. We measure compensation
expense for awards with market conditions based on the grant date fair value, as
determined using a Monte Carlo simulation, and we amortize the expense ratably
over the requisite service period, regardless of whether the market conditions are
achieved and the awards ultimately vest. Compensation expense for the trustee
grants, which fully vest immediately, is fully recognized upon issuance based upon
the fair market value of the shares on the date of grant.
Federal Income Taxes
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 TRS’s. Our TRS’s are subject to
corporate federal and state income tax on their taxable income at regular
statutory rates. During the fourth quarter of 2011, we recognized a $14.5 mil-
lion impairment charge at Dulles Station, Phase II, a development property
held by one of our TRS’s. The impairment charge created a deferred tax asset
45
FORM 10-K of $5.7 million at the TRS level, and we have determined that it is more likely
than not that this deferred tax asset will not be realized, as we cannot reliably
project sufficient future taxable income in the TRS’s to realize all or part of the
deferred tax asset. We have therefore recorded a valuation allowance for the
full amount of the deferred tax asset related to the impairment charge at Dulles
Station, Phase II.
To provide more insight into our operating results, we divide our discussion into
two main sections:
• Consolidated Results of Operations (page 46). An overview analysis of results
on a consolidated basis; and
• Net Operating Income (page 50). A detailed analysis of same-store versus
non-same-store NOI results by segment.
Results of Operations
The discussion that follows is based on our consolidated results of operations for
the years ended December 31, 2014, 2013 and 2012. The ability to compare one
period to another is significantly affected by acquisitions completed and dispositions
made during those years (see note 3 to the consolidated financial statements).
NOI is a non-GAAP measure calculated as real estate rental revenue less real
estate expenses excluding depreciation and amortization and general and
administrative expenses.
Consolidated Results of Operations
Real Estate Rental Revenue
Real estate rental revenue for properties classified as continuing operations for the three years ended December 31, 2014 was as follows (in thousands, except per-
centage amounts):
Minimum base rent
Recoveries from tenants
Provision for doubtful accounts
Lease termination fees
Parking and other tenant charges
Year Ended December 31,
2014
2013
2012
2014 vs 2013
% Change
2013 vs 2012
% Change
$244,684
$226,839
$221,764
$17,845
31,610
(2,021)
891
13,473
26,822
(3,605)
643
12,325
25,528
(4,779)
680
11,601
4,788
1,584
248
1,148
$288,637
$263,024
$254,794
$25,613
7.9%
17.9%
(43.9)%
38.6%
9.3%
9.7%
$5,075
1,294
1,174
(37)
724
$8,230
2.3%
5.1%
(24.6)%
(5.4)%
6.2%
3.2%
Real estate rental revenue is comprised of (a) minimum base rent, which
includes rental revenues recognized on a straight-line basis, (b) revenue from
the recovery of operating expenses from our tenants, (c) provisions for doubtful
accounts, which include provisions for straight-line receivables, (d) revenue from
the collection of lease termination fees and (e) parking and other tenant charges
such as percentage rents.
Minimum Base Rent: Minimum base rent increased by $17.8 million in 2014
primarily due to acquisitions ($14.6 million) and higher occupancy ($6.9 million)
and rental rates ($2.0 million) at same-store properties. These were partially off-
set by lower occupancy ($5.0 million) at Silverline Center, which is under rede-
velopment, and higher amortization of capitalized lease incentives ($0.5 million)
at same-store properties.
46
WASHINGTON REIT Occupancy for properties classified as continuing operations by segment for the
three years ended December 31, 2014 was as follows:
Segment
Office
Retail
Multifamily(1)
Total
2014
86.9%
94.4%
93.8%
90.5%
December 31,
2013
85.7%
91.3%
92.1%
88.8%
2012
2014 vs 2013
2013 vs 2012
85.2%
91.2%
94.1%
88.9%
1.2%
3.1%
1.7%
1.7%
0.5%
0.1%
(2.0)%
(0.1)%
(1) We substantially completed major construction activities at The Maxwell by the end of 2014. However, as of
December 31, 2014, only two of six residential floors were available for occupancy. Therefore, we will not
include The Maxwell’s units in our leasing and occupancy calculations until the first quarter of 2015.
Occupancy represents occupied square footage indicated as a percentage of
total square footage as of the last day of that period.
Our overall occupancy increased to 90.5% in 2014 from 88.8% in 2013, with
higher occupancy in all segments.
Our overall occupancy decreased to 88.8% in 2013 from 88.9% in 2012, with
a decline in the multifamily segment partially offset by higher occupancy in the
office and retail segments.
A detailed discussion of occupancy by segment can be found in the Net
Operating Income section.
Minimum base rent increased by $5.1 million in 2013 primarily due to acquisi-
tions ($3.0 million) and higher rental rates ($5.8 million) at same-store proper-
ties, partially offset by lower occupancy ($2.4 million), higher rent abatements
($0.7 million) and higher amortization of deferred lease incentives ($0.2 million)
at same-store properties.
Recoveries from Tenants: Recoveries from tenants increased by $4.8 million
in 2014 primarily due to acquisitions ($3.4 million) and higher reimbursements
($1.9 million) from same-store properties. These were partially offset by lower reim-
bursements ($0.5 million) from Silverline Center, which is under redevelopment.
Recoveries from tenants increased by $1.3 million in 2013 primarily due to
higher reimbursements for operating expenses from same-store properties.
Provision for Doubtful Accounts: Provision for doubtful accounts decreased by
$1.6 million in 2014 primarily due to lower provisions in the retail ($1.2 million)
and office ($0.4 million) segments.
Provision for doubtful accounts decreased by $1.2 million in 2013 primarily due
to lower provisions in the retail segment.
Lease Termination Fees: Lease termination fees increased by $0.2 million in
2014 due to higher fees in the office segment.
Lease termination fees slightly decreased in 2013 as higher fees from acqui-
sitions ($0.1 million) were offset by lower fees from same-store properties
($0.1 million).
Parking and Other Tenant Charges: Parking and other tenant charges increased
by $1.1 million in 2014 primarily due to increases in parking income from acquisi-
tions ($0.7 million) and same-store properties ($0.2 million).
Parking and other tenant charges increased by $0.7 million in 2013 primarily due
to increases in parking income from same-store properties ($0.5 million) and
acquisitions ($0.3 million).
47
FORM 10-K Real Estate Expenses
Real estate expenses for the three years ended December 31, 2014 were as follows (in thousands except percentage amounts):
Property operating expenses
Real estate taxes
Year Ended December 31,
2014
$ 70,259
33,436
$103,695
2013
$64,241
29,052
$93,293
2012
$59,481
27,064
$86,545
2014 vs 2013
% Change
2013 vs 2012
% Change
$ 6,018
4,384
$10,402
9.4%
15.1%
11.1%
$4,760
1,988
$6,748
8.0%
7.3%
7.8%
Real estate expenses as a percentage of revenue were 35.9%, 35.5% and 34.0%
for the three years ended December 31, 2014, 2013 and 2012, respectively.
Property Operating Expenses: Property operating expenses include utilities,
repairs and maintenance, property administration and management, operating
services, common area maintenance, property insurance, bad debt and other
operating expenses.
Property operating expenses increased by $6.0 million in 2014 primarily due
to acquisitions ($4.6 million). Property operating expenses from same-store
properties increased by $1.1 million primarily due to higher utilities expenses
($0.8 million), higher snow removal costs ($0.8 million) and higher administra-
tive expenses ($0.3 million), partially offset by higher recoveries of uncollectible
receivables ($0.8 million).
Property operating expenses increased by $4.8 million in 2013 primarily due to
acquisitions ($0.8 million) and property operating expenses from same-store
properties, which increased by $3.8 million primarily due to lower recoveries
of bad debt ($0.9 million), and higher administrative ($0.8 million), repairs and
maintenance ($0.6 million), snow removal ($0.4 million), utilities ($0.3 million),
custodial ($0.2 million) and vacant space preparation ($0.2 million) expenses.
Real Estate Taxes: Real estate taxes increased by $4.4 million in 2014 primarily
due to acquisitions ($3.4 million) and higher real estate taxes at same-store
properties ($1.0 million) due to higher property assessments.
Real estate taxes increased by $2.0 million in 2013 due to acquisitions ($0.4 mil-
lion) and higher real estate taxes at same-store properties ($1.5 million) due to
higher property assessments.
Other Operating Expenses
Other operating expenses for the three years ended December 31, 2014 were as follows (in thousands, except percentage amounts):
Year Ended December 31,
2014
2013
2012
2014 vs 2013
% Change
2013 vs 2012
% Change
Depreciation and amortization
$ 96,011
$ 85,740
$ 85,107
$10,271
Acquisition costs
Interest expense
General and administrative
5,710
59,785
19,761
1,265
63,573
17,535
234
60,627
15,488
4,445
(3,788)
2,226
$181,267
$168,113
$161,456
$13,154
12.0%
351.4%
(6.0)%
12.7%
7.8%
$ 633
1,031
2,946
2,047
$6,657
0.7%
440.6%
4.9%
13.2%
4.1%
48
WASHINGTON REIT Depreciation and Amortization: Depreciation and amortization expense
increased by $10.3 million and $0.6 million in 2014 and 2013, respectively,
primarily due to acquisitions.
Acquisition costs increased by $1.0 million in 2013 primarily due to the acquisi-
tion of The Paramount in 2013 and expenses related to potential acquisitions
in 2014.
Acquisition Costs: Acquisition costs increased by $4.4 million in 2014 primarily
due to the higher volume acquisitions than in 2013.
Interest Expense: Interest expense by debt type for the three years ended
December 31, 2014 was as follows (in thousands, except percentage amounts):
Debt Type
Notes payable
Mortgage notes payable
Lines of credit
Capitalized interest
Total
Year Ended December 31,
2014
$37,424
21,916
2,587
(2,142)
2013
$43,174
18,378
3,257
(1,236)
2012
$37,982
20,847
3,486
(1,688)
$59,785
$63,573
$60,627
$(3,788)
2014 vs 2013
% Change
2013 vs 2012
% Change
$(5,750)
3,538
(670)
(906)
(13.3)%
19.3%
(20.6)%
73.3%
(6.0)%
$5,192
(2,469)
(229)
452
$2,946
13.7%
(11.8)%
(6.6)%
(26.8)%
4.9%
The $5.8 million decrease in notes payable interest during 2014 is primarily due
to the repayment of our 5.25% senior notes in January 2014. The $3.5 million
increase in mortgage interest expense is primarily due to the assumption of
mortgages with the acquisitions of Yale West and The Army Navy Club Building,
partially offset by the repayments of several mortgage notes during 2013. The
$0.7 million decrease in interest expense on our unsecured lines of credit
during 2014 is primarily due to lower average borrowings outstanding during
2014. Capitalized interest increased by $0.9 million during 2013 primarily due to
expenditures on our development/redevelopment projects at The Maxwell and
Silverline Center.
The $5.2 million increase in notes payable interest during 2013 is primarily
due to the issuance of our 3.95% senior notes in 2012, partially offset by the
repayment of our 5.05% senior notes during 2012. The $2.5 million decrease
in mortgage interest expense is primarily due to the repayments of several
mortgage notes during 2013. The $0.2 million decrease in interest expense on
our unsecured lines of credit during 2014 is primarily due to lower average bor-
rowings outstanding during 2013. Capitalized interest decreased by $0.5 million
during 2013 primarily due to placing the development project at 1225 First Street
on hold.
General and Administrative Expense: General and administrative expense
increased by $2.2 million in 2014 primarily due to higher severance expense
($0.8 million), higher short-term incentive compensation expense ($0.5 million),
and higher accelerated depreciation of leasehold improvements ($0.5 million)
related to the relocation of the corporate headquarters to Washington, DC.
General and administrative expense increased by $2.0 million in 2013 primarily
due to higher incentive compensation expense related to the officer three-year
long-term incentive plan.
49
FORM 10-K Discontinued Operations
Income from operations of properties sold or held for sale for the three years ended December 31, 2014 were as follows (in thousands, except for percentages):
Revenues
Property expenses
Real estate impairment
Depreciation and amortization
Interest expense
Total
Year Ended December 31,
2014
$ 892
(346)
—
—
—
2013
$ 45,791
(17,039)
—
(12,161)
(1,196)
2012
2014 vs 2013
% Change
2013 vs 2012
% Change
$ 54,344
$(44,899)
(18,273)
(2,097)
(18,827)
(4,331)
16,693
—
12,161
1,196
(98.1)%
(98.0)%
N/A
(100.0)%
(100.0)%
(96.5)%
$(8,553)
1,234
2,097
6,666
3,135
$ 4,579
(15.7)%
(6.8)%
(100.0)%
(35.4)%
(72.4)%
42.3%
$ 546
$ 15,395
$ 10,816
$(14,849)
Income from operations of properties sold or held for sale decreased by
$14.8 million for the year ended December 31, 2014 due to the completion of the
sale of the former medical office segment during the first quarter of 2014.
Income from operations of properties sold or held for sale increased by $4.6 mil-
lion for the year ended December 31, 2013 primarily due to the medical office
segment being accounted for as discontinued operations.
We recognized a $2.1 million impairment charge for the land at 4661 Kenmore
Avenue during the fourth quarter of 2012 in order to reduce its carrying value to
its fair value of $3.8 million.
Net Operating Income
NOI is the primary performance measure we use to assess the results of our
operations at the property level. We believe that NOI is useful as a performance
measure because, when compared across periods, NOI reflects the impact on
operations of trends in occupancy rates, rental rates and operating costs on an
unleveraged basis, providing perspective not immediately apparent from net
income. NOI excludes certain components from net income in order to provide
results more closely related to a property’s results of operations. For example,
interest expense is not necessarily linked to the operating performance of a real
estate asset. In addition, depreciation and amortization, because of historical
cost accounting and useful life estimates, may distort operating performance at
the property level. As a result of the foregoing, we provide NOI as a supplement
to net income or income from continuing operations, calculated in accordance
with GAAP. NOI does not represent net income or income from continuing oper-
ations, in either case calculated in accordance with GAAP. As such, it should not
be considered an alternative to these measures as an indication of our operating
performance. NOI is calculated as real estate rental revenue less real estate
expenses excluding depreciation and amortization and general and administra-
tive expenses. A reconciliation of NOI to net income follows.
50
WASHINGTON REIT 2014 Compared to 2013
The following tables of selected operating data reconcile NOI to net income attributable to the controlling interests and provide the basis for our discussion of NOI in
2014 compared to 2013. All amounts are in thousands except percentage amounts.
Year Ended December 31,
2014
2013
$ Change
% Change
$10,693
14,920
$25,613
$ 2,132
8,270
$10,402
$ 8,561
6,650
$15,211
4.3%
105.7%
9.7%
2.4%
149.5%
11.1%
5.3%
77.5%
9.0%
Real Estate Rental Revenue
Same-store
Non-same-store(1)
Total real estate rental revenue
Real Estate Expenses
Same-store
Non-same-store(1)
Total real estate expenses
NOI
Same-store
Non-same-store(1)
Total NOI
Reconciliation to Net Income
NOI
Depreciation and amortization
General and administrative expenses
Acquisition costs
Interest expense
Other income
Gain on sale of real estate
Loss on extinguishment of debt
Discontinued operations(2):
Income from properties sold or held for sale
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
$259,607
29,030
$288,637
$ 89,892
13,803
$103,695
$169,715
15,227
$184,942
$184,942
(96,011)
(19,761)
(5,710)
(59,785)
825
570
—
546
105,985
111,601
38
$ 111,639
$248,914
14,110
$263,024
$ 87,760
5,533
$ 93,293
$161,154
8,577
$169,731
$169,731
(85,740)
(17,535)
(1,265)
(63,573)
926
—
(2,737)
15,395
22,144
37,346
—
$ 37,346
(1) Non-same-store properties include: 2014 Multifamily acquisition—Yale West; 2014 Office acquisitions—The Army Navy Club Building and 1775 Eye Street, NW; 2014 Retail acquisition—Spring Valley Retail Center; 2014 Retail sold
(classified as continuing operations)—5740 Columbia Road (parcel at Gateway Overlook); 2013 Multifamily acquisition—The Paramount; 2013 Office redevelopment property—Silverline Center (formerly 7900 Westpark Drive).
(2) Discontinued operations include gains on sale and income from operations for: 2014 and 2013 sold—Atrium Building and Medical Office Portfolio—medical office segment and two office buildings (6565 Arlington Boulevard
and Woodholme Center).
51
FORM 10-K Real estate rental revenue from same-store properties increased by $10.7 mil-
lion in 2014 primarily due to higher occupancy ($6.9 million), higher rental rates
($2.0 million), higher reimbursements ($1.9 million) and lower reserves for
uncollectible revenue ($1.6 million), partially offset by higher rent abatements
($1.7 million).
An analysis of NOI by segment follows.
Office Segment:
Year Ended December 31,
2014
2013
$ Change % Change
Real estate expenses from same-store properties increased by $2.1 million in
2014 primarily due to higher real estate taxes ($1.0 million) due to higher assess-
ments across the portfolio, higher utilities expenses ($0.8 million), higher snow
removal costs ($0.8 million) and higher administrative expenses ($0.3 million),
partially offset by higher recoveries of uncollectible receivables ($0.8 million).
Real Estate Rental Revenue
Same-store
Non-same-store(1)
$146,542
$139,270
$ 7,272
5.2%
19,574
13,069
6,505
49.8%
Total real estate rental revenue
$166,116
$152,339
$13,777
9.0%
Occupancy
Same-store
Non-same-store
Total
December 31,
2014
93.3%
71.2%
90.5%
2013
89.4%
80.4%
88.8%
Same-store occupancy increased to 93.3% in 2014, with the increases in all
segments. Non-same-store occupancy decreased to 71.2% in 2014, primarily
due to lower occupancy at Silverline Center. This property went into redevelop-
ment during the fourth quarter of 2013 (see note 3 to the consolidated financial
statements) and decreased to 53.6% occupancy at the end of 2014 from 78.9%
at the end of 2013. The renovation of the property is expected to be completed
during the first quarter of 2015. During 2014, 65.2% of the commercial square
footage expiring was renewed as compared to 78.4% in 2013. During 2014, we
executed new and renewal leases for 1.4 million commercial square feet at an
average rental rate of $33.99 per square foot, an increase of 9.5%, with average
tenant improvements and leasing commissions and incentives (including free
rent) of $38.13 per square foot.
Real Estate Expenses
Same-store
Non-same-store(1)
$ 54,266
$ 52,212
$ 2,054
3.9%
9,637
5,081
4,556
89.7%
Total real estate expenses
$ 63,903
$ 57,293
$ 6,610
11.5%
NOI
Same-store
Non-same-store(1)
Total NOI
$ 92,276
$ 87,058
$ 5,218
6.0%
9,937
7,988
1,949
24.4%
$102,213
$ 95,046
$ 7,167
7.5%
(1) Non-same-store properties include: 2014 Office acquisitions—The Army Navy Club Building and 1775 Eye
Street, NW; 2013 redevelopment property—Silverline Center.
Real estate rental revenue from same-store properties increased by $7.3 mil-
lion in 2014 primarily due to higher occupancy ($5.4 million), higher rental rates
($1.9 million), higher reimbursements ($0.7 million), lower reserves for uncol-
lectible revenue ($0.4 million) and higher parking income ($0.2 million), partially
offset by higher rent abatements ($1.5 million).
Real estate expenses from same-store properties increased by $2.1 million in 2014
primarily due to higher utilities expenses ($0.8 million), real estate taxes ($0.4 mil-
lion), custodial services ($0.3 million) and administrative expenses ($0.3 million).
Occupancy
Same-store
Non-same-store
Total
December 31,
2014
92.1%
61.4%
86.9%
2013
86.6%
78.9%
85.7%
52
WASHINGTON REIT Same-store occupancy increased to 92.1% in 2014 primarily due to higher occu-
pancy at Braddock Metro Center. The decrease in non-same-store occupancy
is primarily due to lower occupancy at Silverline Center, which went into rede-
velopment during the fourth quarter of 2013. During 2014, 64.2% of the square
footage that expired was renewed compared to 65.2% in 2013. During 2014, we
executed new and renewal leases for 1.0 million square feet of office space at
an average rental rate of $37.15 per square foot, an increase of 8.9%, with aver-
age tenant improvements and leasing commissions and incentives (including
free rent) of $47.14 per square foot.
Retail Segment:
Real Estate Rental Revenue
Same-store
Non-same-store(1)
Year Ended December 31,
2014
2013
$ Change
% Change
$59,418
$56,055
$3,363
6.0%
Occupancy
Same-store
Non-same-store
Total
December 31,
2014
94.5%
92.8%
94.4%
2013
91.3%
100.0%
91.3%
Occupancy increased to 94.5% in 2014 primarily due to higher occupancy at
Bradlee Shopping Center and Westminster Shopping Center. The decrease
in non-same-store occupancy reflects the acquisition of Spring Valley Retail
Center during the fourth quarter of 2014, which was 96.2% occupied at acqui-
sition. During 2014, 72.5% of the square footage that expired was renewed
compared to 92.9% in 2013. During 2014, we executed new and renewal leases
for 0.3 million square feet of retail space at an average rental rate of $24.44, an
increase of 12.8%, with average tenant improvements and leasing commissions
and incentives (including free rent) of $10.49 per square foot.
845
134
711
530.6%
Multifamily Segment:
Total real estate rental revenue
$60,263
$56,189
$4,074
7.3%
Real Estate Expenses
Same-store
Non-same-store(1)
$13,801
$13,747
$ 54
0.4%
221
21
200
952.4%
Real Estate Rental Revenue
Year Ended December 31,
2014
2013
$ Change
% Change
Total real estate expenses
$14,022
$13,768
$ 254
1.8%
Same-store
Non-same-store(1)
$53,647
$53,589
$ 58
0.1%
8,611
907
7,704
849.4%
$45,617
$42,308
$3,309
7.8%
Total real estate rental revenue
$62,258
$54,496
$7,762
14.2%
624
113
511
452.2%
Real Estate Expenses
$46,241
$42,421
$3,820
9.0%
Same-store
$21,825
$21,801
$ 24
0.1%
NOI
Same-store
Non-same-store(1)
Total NOI
(1) Non-same-store properties include: 2014 acquisition—Spring Valley Retail Center; 2014 sold (classified as
continuing operations)—5740 Columbia Road (parcel at Gateway Overlook).
Non-same-store(1)
3,945
431
3,514
815.3%
Total real estate expenses
$25,770
$22,232
$3,538
15.9%
Real estate rental revenue increased by $3.4 million in 2014 primarily due
to lower reserves for uncollectible revenue ($1.2 million), higher occupancy
($1.1 million), higher reimbursements ($0.9 million) and higher rental rates
($0.3 million).
NOI
Same-store
Non-same-store(1)
Total NOI
$31,822
$31,788
$ 34
0.1%
4,666
476
4,190
880.3%
$36,488
$32,264
$4,224
13.1%
(1) Non-same-store properties include: 2014 acquisition—Yale West; 2013 acquisition—The Paramount.
Real estate expenses increased by $0.1 million in 2014 primarily due to higher
snow removal costs ($0.6 million), partially offset by higher recoveries of bad
debt ($0.5 million).
53
FORM 10-K Real estate rental revenue from same-store properties increased by $0.1 million
in 2014 primarily due to higher occupancy ($0.4 million), partially offset by lower
rental rates ($0.2 million) and higher rent abatements ($0.2 million).
Real estate expenses from same-store properties slightly increased in 2014
primarily due to higher real estate taxes ($0.4 million), partially offset by lower
bad debt expense ($0.3 million).
Occupancy
Same-store
Non-same-store
Total
December 31,
2014
94.1%
91.6%
93.8%
2013
92.6%
85.4%
92.1%
Same-store occupancy increased to 94.1% in 2014 primarily due to higher occu-
pancy at 3801 Connecticut Avenue.
54
WASHINGTON REIT 2013 Compared to 2012
The following tables of selected operating data reconcile NOI to net income attributable to the controlling interests and provide the basis for our discussion of NOI in
2013 compared to 2012. All amounts are in thousands except percentage amounts.
Year Ended December 31,
2013
2012
$ Change
% Change
$5,215
3,015
$8,230
$5,296
1,452
$6,748
$(81)
1,563
$1,482
2.2%
18.4%
3.2%
6.6%
24.7%
7.8%
(0.1)%
14.9%
0.9%
Real Estate Rental Revenue
Same-store
Non-same-store(1)
Total real estate rental revenue
Real Estate Expenses
Same-store
Non-same-store(1)
Total real estate expenses
NOI
Same-store
Non-same-store(1)
Total NOI
Reconciliation to Net Income
NOI
Depreciation and amortization
General and administrative expenses
Acquisition costs
Interest expense
Other income
Loss on extinguishment of debt
Discontinued operations(2):
Income from properties sold or held for sale
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
$243,633
19,391
$263,024
$85,956
7,337
$93,293
$157,677
12,054
$169,731
$238,418
16,376
$254,794
$80,660
5,885
$86,545
$157,758
10,491
$168,249
$169,731
$168,249
(85,740)
(17,535)
(1,265)
(63,573)
926
(2,737)
15,395
22,144
37,346
—
$37,346
(85,107)
(15,488)
(234)
(60,627)
975
—
10,816
5,124
23,708
—
$23,708
(1) Non-same-store properties include: 2013 Multifamily acquisition—The Paramount; 2013 Office redevelopment property—Silverline Center (formerly 7900 Westpark Drive); 2012 Office acquisition—Fairgate at Ballston
(2) Discontinued operations include gain on disposals and income from operations for: 2013 held for sale and sold—Atrium Building and Medical Office Portfolio—medical office segment and two office buildings (6565 Arlington
Boulevard and Woodholme Center); 2012 sold—Plumtree Medical Center and 1700 Research Boulevard.
55
FORM 10-K Real estate rental revenue from same-store properties increased by $5.2 mil-
lion in 2013 primarily due to higher rental rates ($5.8 million), lower reserves
for uncollectible revenue ($1.0 million), higher reimbursements for operating
expenses ($1.2 million) and higher parking income ($0.5 million), partially offset
by lower occupancy ($2.4 million) and higher rent abatements ($0.9 million).
Real estate expenses from same-store properties increased by $5.3 million
in 2013 primarily due to higher real estate taxes ($1.5 million) due to higher
assessments across the portfolio, lower recoveries of uncollectible receivables
($0.9 million), higher administrative expenses ($0.8 million), higher repairs and
maintenance expenses ($0.6 million), higher snow removal costs ($0.4 million),
higher usage of electricity ($0.3 million), higher custodial expenses ($0.2 million)
and higher vacant space preparation expenses ($0.2 million).
Occupancy
Same-store
Non-same-store
Total
December 31,
2013
89.7%
79.2%
88.8%
2012
89.2%
84.9%
88.9%
Same-store occupancy increased to 89.7% in 2013, with the increases in office
and retail occupancy partially offset by lower multifamily occupancy. Non-same-
store occupancy decreased to 79.2% in 2013 from 84.9% in 2012, driven by
lower occupancy at Fairgate at Ballston and Silverline Center. During 2013,
78.4% of the commercial square footage expiring was renewed as compared to
58.3% in 2012, excluding properties sold or classified as held for sale. During
2013, we executed new and renewal leases (excluding properties classified
as sold or held for sale) for 1.6 million commercial square feet at an average
rental rate of $29.28 per square foot, an increase of 10.2%, with average tenant
improvements and leasing commissions and incentives (including free rent) of
$38.40 per square foot.
An analysis of NOI by segment follows.
Office Segment:
Year Ended December 31,
2013
2012
$ Change % Change
Real Estate Rental Revenue
Same-store
Non-same-store(1)
$133,855
$131,025
$2,830
2.2%
18,484
16,376
2,108
12.9%
Total real estate rental revenue
$152,339
$147,401
$4,938
3.4%
Real Estate Expenses
Same-store
Non-same-store(1)
$ 50,387
$ 47,491
$2,896
6.1%
6,906
5,885
1,021
17.3%
Total real estate expenses
$ 57,293
$ 53,376
$3,917
7.3%
NOI
Same-store
Non-same-store(1)
Total NOI
$ 83,468
$ 83,534
$ (66)
(0.1)%
11,578
10,491
1,087
10.4%
$ 95,046
$ 94,025
$1,021
1.1%
(1) Non-same-store properties include: 2013 redevelopment property—Silverline Center; 2012 acquisition—
Fairgate at Ballston.
Real estate rental revenue from same-store properties increased by $2.8 million
in 2013 primarily due to higher rental rates ($2.5 million), reimbursements for
operating expenses ($0.9 million) and real estate taxes ($0.5 million), and park-
ing income ($0.4 million), partially offset by lower occupancy ($0.7 million) and
higher rent abatements ($0.6 million).
Real estate expenses from same-store properties increased by $2.9 million
in 2013 primarily due to higher real estate taxes ($0.7 million), administrative
expenses ($0.6 million), operating services ($0.5 million), repairs and main-
tenance expenses ($0.2 million), consumption of electricity ($0.3 million) and
lower recoveries of uncollectible receivables ($0.5 million).
56
WASHINGTON REIT Occupancy
Same-store
Non-same-store
Total
December 31,
2013
87.1%
77.9%
85.7%
2012
85.3%
84.9%
85.2%
Same-store occupancy increased to 87.1% in 2013 from 85.3% in 2012, primar-
ily due to higher occupancy at 2000 M Street and 6110 Executive Boulevard,
partially offset by lower occupancy at Braddock Metro Center. The decrease in
non-same-store occupancy is primarily due to lower occupancy at Fairgate at
Ballston and Silverline Center, which went into redevelopment during the fourth
quarter of 2013. During 2013, 65.2% of the square footage that expired was
renewed compared to 50.4% in 2012, excluding properties sold or classified
as held for sale. During 2013, we executed new and renewal leases (excluding
properties classified as sold or held for sale) for 1.1 million square feet of office
space at an average rental rate of $34.27 per square foot, an increase of 8.4%,
with average tenant improvements and leasing commissions and incentives
(including free rent) of $51.67 per square foot.
Retail Segment:
Year Ended December 31,
2013
2012
$ Change
% Change
Real Estate Rental Revenue
$56,189
$54,506
$1,683
Real Estate Expenses
13,768
12,702
1,066
NOI
$42,421
$41,804
$ 617
3.1%
8.4%
1.5%
Real estate rental revenue increased by $1.7 million in 2013 primarily due to
higher occupancy ($1.8 million) and lower reserves for uncollectible revenue
($1.2 million), partially offset by lower occupancy ($1.1 million).
Real estate expenses increased by $1.1 million in 2013 primarily due to higher
real estate taxes ($0.3 million), snow removal costs ($0.3 million) and bad debt
expense ($0.2 million).
Occupancy increased to 91.3% in 2013 from 91.2% in 2012 primarily due to
higher occupancy at the Centre at Hagerstown and Gateway Overlook, partially
offset by lower occupancy at Westminster and Bradlee Shopping Center. During
2013, 92.9% of the square footage that expired was renewed compared to
75.7% in 2012. During 2013, we executed new and renewal leases for 0.5 million
square feet of retail space at an average rental rate of $18.67, an increase of
17.9%, with average tenant improvements and leasing commissions and incen-
tives (including free rent) of $9.96 per square foot.
Multifamily Segment:
Year Ended December 31,
2013
2012
$ Change
% Change
Real Estate Rental Revenue
Same-store
Non-same-store(1)
$53,589
$52,887
$ 702
907
—
907
Total real estate rental revenue
$54,496
$52,887
$1,609
Real Estate Expenses
Same-store
Non-same-store(1)
$21,801
$20,467
$1,334
431
—
431
Total real estate expenses
$22,232
$20,467
$1,765
1.3%
N/A
3.0%
6.5%
N/A
8.6%
NOI
Same-store
Non-same-store(1)
Total NOI
$31,788
$32,420
$ (632)
(1.9)%
476
—
476
N/A
$32,264
$32,420
$ (156)
(0.5)%
(1) Non-same-store properties include: 2014 acquisition—The Paramount.
Real estate rental revenue from same-store properties increased by $0.7 million
in 2013 primarily due to higher rental rates ($1.5 million), partially offset by lower
occupancy ($0.6 million) and higher rent abatements ($0.2 million).
Real estate expenses from same-store properties increased by $1.3 million in
2013 primarily due to higher real estate taxes ($0.5 million), repairs and mainte-
nance expenses ($0.4 million) and bad debt expense ($0.2 million).
57
FORM 10-K Occupancy
Same-store
Non-same-store
Total
December 31,
2013
92.6%
85.4%
92.1%
2012
94.1%
N/A
94.1%
Same-store occupancy decreased to 92.6% in 2013 from 94.1% in 2012 due
primarily to lower occupancy at Roosevelt Towers, the Kenmore and Bethesda
Hill Apartments.
Liquidity and Capital Resources
Capital Structure
We manage our capital structure to reflect a long-term investment approach,
generally seeking to match the cash flow of our assets with a mix of equity
and various debt instruments. We expect that our capital structure will allow us
to obtain additional capital from diverse sources that could include additional
equity offerings of common shares, public and private secured and unsecured
debt financings, asset dispositions, operating units and joint venture equity. Our
ability to raise funds through the sale of debt and equity securities is dependent
on, among other things, general economic conditions, general market conditions
for REITs, our operating performance, our debt rating and the current trading
price of our common shares. We analyze which source of capital we believe to
be most advantageous to us at any particular point in time.
We currently expect that our potential sources of liquidity for acquisitions, devel-
opment, redevelopment, expansion and renovation of properties, and operating
and administrative expenses, may include:
• Cash flow from operations;
• Borrowings under our unsecured credit facilities or other short-term facilities;
• Issuances of our equity securities and/or common units in operating partnerships;
During 2015, we expect that we will have significant capital requirements, includ-
ing the following items. As of February 24, 2015, we had cash and cash equiv-
alents of approximately $34 million and availability under our unsecured credit
facilities of $434.5 million.
• Funding dividends and distributions to our shareholders;
• $150.0 million to pay off or refinance our 5.35% unsecured notes that mature
in May 2015;
• Approximately $65–$70 million to invest in our existing portfolio of operating
assets, including approximately $35–$40 million to fund tenant-related capital
requirements and leasing commissions;
• Approximately $15–$20 million to invest in our development and redevelop-
ment projects; and
• Funding for potential property acquisitions throughout the remainder of 2015,
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 have access to the capital
resources necessary to fund our requirements in 2015. However, as a result of
general market conditions in the greater Washington metro region, economic
conditions affecting the ability to attract and retain tenants, potentially rising
interest rates or 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 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 in the prior paragraph. 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.
• Issuances of preferred stock;
Debt Financing
• Proceeds from long-term secured or unsecured debt financings, to include
construction loans;
• Investment from joint venture partners; and
• Net proceeds from the sale of assets.
We generally use secured or unsecured, corporate-level debt, including unse-
cured notes, our unsecured credit facilities, 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. We also
58
WASHINGTON REIT 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.
At December 31, 2014 and 2013, our debt was as follows (in thousands):
December 31,
2014
2013
to make commercial real estate loans, may result in higher interest rates and
increased interest expense or inhibit our ability to finance our obligations.
Mortgage Debt
At December 31, 2014, our $418.5 million in mortgage notes payable, which
includes $4.0 million in net unamortized discounts due to fair value adjust-
ments, bore an effective weighted average fair value interest rate of 5.2% and
had a weighted average maturity of 3.0 years. We may either initiate secured
mortgage debt or assume mortgage debt from time-to-time in conjunction with
property acquisitions.
Mortgage notes payable(1)
Unsecured lines of credit payable(1)
Unsecured notes payable(1)
$ 418,525
$ 294,671
Unsecured Credit Facilities
50,000
747,208
—
846,703
$1,215,733
$1,141,374
Our primary source of liquidity is our two revolving credit facilities. We can bor-
row up to $500.0 million under these lines, which bear interest at an adjustable
spread over LIBOR based on our public debt rating.
(1) See notes 4, 5 and 6 to the consolidated financial statements for further detail on our debt.
Our future debt maturities are as follows (in thousands):
Year
2015
2016
2017
2018
2019
Thereafter
Mortgage
Notes
Payable
Unsecured
Notes
Payable
Unsecured
Lines of Credit
Payable
Total
Debt
$ 4,512
$150,000
$ 5,000
$ 159,512
163,637
154,436
3,135
33,909
54,871
414,500
—
—
—
—
600,000
750,000
45,000
—
—
—
—
208,637
154,436
3,135
33,909
654,871
50,000
1,214,500
Net discounts/premiums
4,025
(2,792)
—
1,233
Total
$418,525
$747,208
$50,000
$1,215,733
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
Credit Facility No. 1 is a four-year, $100.0 million unsecured credit facility
maturing in June 2015, and may be extended by one year at our option. We
had $5.0 million outstanding and no letters of credit issued as of December 31,
2014, related to Credit Facility No. 1. Borrowings under the facility bear interest
at LIBOR plus a spread based on the credit rating on our publicly issued debt.
The interest rate spread is currently 120 basis points. All outstanding advances
are due and payable upon maturity in June 2015, and may be extended by
one year at our option. Interest only payments are due and payable generally
on a monthly basis. In addition, we pay a facility fee based on the credit rat-
ing of our publicly issued debt which currently equals 0.25% per annum of the
$100.0 million committed capacity, without regard to usage. Rates and fees may
be increased or decreased based on changes in our senior unsecured credit
ratings. These fees are payable quarterly.
Credit Facility No. 2 is a four-year $400.0 million unsecured credit facility
maturing in July 2016, and may be extended for one year at our option. We had
$45.0 million outstanding and no letters of credit issued as of December 31,
2014 related to Credit Facility No. 2. Advances under this agreement bear
interest at LIBOR plus a spread based on the credit rating of our publicly
issued debt. The interest rate spread is currently 120 basis points. All outstand-
ing advances are due and payable upon maturity in July 2016, and may be
extended for one year at our option. Interest only payments are due and payable
59
FORM 10-K generally on a monthly basis. In addition, we pay a facility fee based on the
credit rating of our publicly issued debt which currently equals 0.25% per annum
of the $400.0 million committed capacity, without regard to usage. Rates and
fees may be increased or decreased based on changes in our senior unsecured
credit ratings. These fees are payable quarterly.
Unsecured Notes
We generally issue unsecured notes to fund our real estate assets long-term. In
issuing future unsecured notes, we seek to ladder the maturities of our debt to
mitigate exposure to interest rate risk in any particular future year.
Our unsecured credit facilities contain financial and other covenants with which
we must comply. Some of these covenants include:
• A minimum tangible net worth;
• A maximum ratio of total liabilities to gross asset value, calculated using an
Depending upon market conditions, opportunities to issue unsecured notes on
attractive terms may not be available. During periods in the recent past, debt
capital was essentially unavailable for extended periods of time. While debt mar-
kets have improved, it is difficult to predict if the improvement is sustainable.
estimate of fair market value of our assets;
Our unsecured notes contain covenants with which we must comply, including:
• A maximum ratio of secured indebtedness to gross asset value, calculated
• Limits on our total indebtedness;
using an estimate of fair market value of our assets;
• A minimum ratio of quarterly EBITDA (earnings before interest, taxes, depre-
ciation, amortization and extraordinary and nonrecurring gains and losses) to
fixed charges, including interest expense;
• A minimum ratio of unencumbered asset value, calculated using a fair value of
our assets, to unsecured indebtedness;
• A minimum ratio of net operating income from our unencumbered properties
to unsecured interest expense; and
• A maximum ratio of permitted investments to gross asset value, calculated
using an estimate of fair market value of our assets.
Failure to comply with any of the covenants under our unsecured credit facili-
ties or other debt instruments could result in a default under one or more of our
credit facility covenants. This could cause our lenders to accelerate the timing of
payments and would therefore have a material adverse effect on our business,
operations, financial condition and liquidity. As of December 31, 2014, we were
in compliance with our credit facility covenants. In addition, our ability to draw on
our unsecured credit facilities or incur other unsecured debt in the future could
be restricted by the credit facility covenants.
We anticipate that in the near term we may rely to a greater extent upon our
unsecured credit facilities. To the extent that we maintain larger balances on our
unsecured credit facilities or maintain balances on our unsecured credit facilities
for longer periods, adverse fluctuations in interest rates could have a material
adverse effect on earnings.
• Limits on our secured indebtedness;
• Limits on our required debt service payments; and
• Maintenance of a minimum level of unencumbered assets.
Failure to comply with any of the covenants under our unsecured notes or other
debt instruments could result in a default under one or more of our unsecured
note covenants. This could cause our debt holders to accelerate the timing of
payments and would therefore have a material adverse effect on our business,
operations, financial condition and liquidity. As of December 31, 2014, we were
in compliance with our unsecured note covenants. In addition, our ability to draw
on our unsecured credit facilities or incur other unsecured debt in the future
could be restricted by our unsecured note covenants.
From time to time, we may seek to repurchase and cancel our outstanding
unsecured notes through open market purchases, privately negotiated transac-
tions 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.
Common Equity
We have authorized for issuance 100.0 million common shares, of which
67.8 million shares were outstanding at December 31, 2014.
We are party to a sales agency financing agreement with BNY Mellon Capital
Markets, LLC relating to the issuance and sale of up to $250.0 million of our
60
WASHINGTON REIT common shares from time to time over a period of no more than 36 months from
June 2012. Sales of our common shares are made at market prices prevailing
at the time of sale. We use net proceeds from the sale of common shares under
this program for general corporate purposes. As of December 31, 2014, we had
issued 1.1 million common shares under this program at a weighted average
share price of $27.86 for gross proceeds of $31.3 million. In January 2015, we
issued an additional 0.2 million common shares at a weighted average share
price of $28.34 for gross proceeds of $5.2 million. As of February 23, 2015, we
are able to issue up to an additional $213.5 million of our common shares under
this program.
We have a dividend reinvestment program, whereby shareholders may use their
dividends and optional cash payments to purchase common shares. The com-
mon shares sold under this program may either be common shares issued by
us or common shares purchased in the open market. We use the net proceeds
under this program for general corporate purposes. We did not issue any shares
under this program during 2014 or 2013. During 2012, we issued 0.1 million com-
mon shares at a weighted average price of $29.67 per share, raising $1.3 million
in net proceeds.
Our dividend and distribution payments for the three years ended December 31,
2014 were as follows (in thousands):
Year Ended December 31,
2014
2013
2012
Common dividends
$80,277
$80,104
$97,734
Noncontrolling interest distributions
3,454
—
—
$83,731
$80,104
$97,734
Dividends paid during 2014 increased from 2013 primarily due to an increase in
shares outstanding from issuances under our sales agency financing agreement.
Dividends paid during 2013 decreased from 2012 primarily due to a decrease in
the quarterly dividend paid per share from $0.43375 to $0.30 during 2012.
The $3.5 million distribution to noncontrolling interests in 2014 is related to the
disposition of 4661 Kenmore Avenue as part of the Medical Office Portfolio sale
(see note 3 to the consolidated financial statements).
Preferred Equity
Capital Commitments
Washington REIT’s Board of Trustees can, at its discretion, authorize the
issuance of up to 10.0 million shares of preferred stock. The ability to issue
preferred equity provides Washington REIT an additional financing tool that may
be used to raise capital for future acquisitions or other business purposes. As of
December 31, 2014, no shares of preferred stock had been authorized or issued.
We will require capital for development and redevelopment projects currently
underway and in the future. During 2014 we substantially completed major con-
struction activities at The Maxwell, a mid-rise apartment property in Arlington,
Virginia. As of December 31, 2014, we had under development the renovation of
Silverline Center, an office building in Tysons, Virginia.
Dividends
We currently pay dividends quarterly at a rate of $0.30 per share. The mainte-
nance of our dividend level is subject to various factors reviewed by the Board
of Trustees in its discretion. These factors include our results of operations, the
availability of cash and the REIT distribution requirements, which require at least
90% of our REIT taxable income to be distributed to shareholders on an annual
basis. When setting the dividend level, our Board looks in particular at trends
in our level of funds from operations, together with associated recurring capital
improvements, tenant improvements, leasing commissions and incentives, and
adjustments to straight-line rents to reflect cash rents received.
Our total investment in The Maxwell is expected to be $50 million, including land
costs and our partner’s 10% share. We have secured debt financing totaling
$33.0 million. As of December 31, 2014, we had invested $44 million in The
Maxwell including land costs and we expect to fund approximately $6 million in
2015 on this project. We substantially completed major construction activities at
this development project during the fourth quarter of 2014. As of December 31,
2014, we had received certificates of occupancy for two of the six residential
floors, and received certificates of occupancy for the remaining floors during the
first quarter of 2015.
Our total investment in the Silverline Center renovation is expected to be
approximately $35.0 million. As of December 31, 2014, we had invested
61
FORM 10-K $25.1 million in the Silverline Center renovation and we expect to fund approx-
imately $10 million in 2015 on this project. We currently expect to complete the
renovation of the property during the first quarter of 2015.
Contractual Obligations
As of December 31, 2014, certain contractual obligations will require significant
capital as follows (in thousands):
As of December 31, 2014, we had invested $20.8 million (including land costs)
in a potential high-rise multifamily property at 1225 First Street in Alexandria,
Virginia. We have a 95% interest in this project. In the first quarter 2013, we
decided to delay commencement of construction due to market conditions and
concerns of oversupply. We will continue to reassess this project on a periodic
basis going forward.
As of December 31, 2014, we had no outstanding contractual commitments
related to our development and redevelopment projects, and expect to fund
approximately $16 million of total development/redevelopment spending
during 2015.
We anticipate funding several major renovation projects in our portfolios during
2015, as follows (in thousands):
Office
Retail
Multifamily
Total
$12,252
828
8,366
$21,446
These projects include unit and common area renovations, facade restorations
and window curtain wall replacement at multifamily properties; lobby renova-
tions, conference center build out, HVAC upgrades and elevator modernizations
at office properties; and roof replacements and facade renovations at retail
properties. Not all of the anticipated spending had been committed via executed
construction contracts at December 31, 2014. We expect to fund these projects
using cash generated by our real estate operations, through borrowings on
our unsecured credit facilities, or raising additional debt or equity capital in the
public market.
Payments due by Period
Total
Less than
1 year
1–3
years
4–5
years
After
5 years
Long-term debt(1)
$1,498,210
$214,037
$478,530
$348,941
$456,702
Purchase obligations(2)
Tenant-related capital(3)
Building capital(4)
Operating leases
8,247
20,584
20,876
14,727
5,150
20,584
20,876
343
3,097
—
—
929
—
—
—
—
—
—
520
12,935
(1) See notes 4, 5 and 6 of our consolidated financial statements. Amounts include principal, interest, unused
commitment fees and facility fees.
(2) Represents electricity sales agreements with terms through 2016 and natural gas purchase agreements
with terms through 2014.
(3) Committed tenant-related capital based on executed leases as of December 31, 2014.
(4) Committed building capital additions based on contracts in place as of December 31, 2014.
We have various standing or renewable contracts with vendors. The majority of
these contracts can be canceled with immaterial or no cancellation penalties,
with the exception of our elevator maintenance, electricity sales and natural gas
purchase agreements, which are included above on the purchase obligations
line. Contract terms on leases that can be canceled are generally one year or
less. We are currently committed to fund tenant-related capital improvements
as described in the table above for executed leases. However, expected leasing
levels could require additional tenant-related capital improvements which are not
currently committed. We expect that total tenant-related capital improvements,
including those already committed, will be approximately $25 million in 2015.
Due to the competitive office leasing market we expect that tenant-related capi-
tal costs will continue at this level into 2016.
62
WASHINGTON REIT 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 signifi-
cantly, we may have to reduce our dividend. Consolidated cash flows for the three years ended December 31, 2014 were as follows (in thousands):
Cash provided by operating activities
Cash (used in) provided by investing activities
Cash used in financing activities
Year ended December 31,
Variance
2014
$ 80,701
(107,882)
(87,335)
2013
$ 113,318
189,848
(191,928)
2012
$131,448
(88,796)
(35,998)
2014 vs 2013
$ (32,617)
(297,730)
104,593
2013 vs 2012
$ (18,130)
278,644
(155,930)
The decrease in cash provided by operating activities in 2014 was primarily due
to the loss of income from properties sold as part of the Medical Office Portfolio.
The decrease in cash provided by operating activities in 2013 was primarily due
to the loss of income from properties sold as part of the Medical Office Portfolio
and higher interest payments.
Net cash used in investing activities increased in 2014 due to a higher volume of
acquisitions, less proceeds from the sale of properties and higher development
spending. Net cash provided by investing activities increased in 2013 primarily
due to the closing on Purchase and Sale Agreements I and II of the Medical
Office Portfolio, partially offset by higher development spending.
Net cash used in financing activities decreased in 2014 primarily due to the
repayment of several mortgage notes in 2013. Net cash used in financing activi-
ties increased in 2013 primarily due to the repayment of several mortgage notes
and the 5.125% unsecured notes in 2013.
Capital Improvements and Development Costs
Our capital improvement and development costs for the three years ended
December 31, 2014 were as follows (in thousands):
Accretive capital improvements:
Acquisition related
Expansions and major renovations
Development/redevelopment
Tenant improvements (including first
generation leases)
Total accretive capital improvements(1)
Other capital improvements:
Year Ended December 31,
2014
2013
2012
$2,533
24,602
43,264
22,096
92,495
8,579
$1,369
23,831
15,826
21,746
62,772
8,883
$3,718
20,147
6,494
18,333
48,692
8,982
Total
$101,074
$71,655
$57,674
(1) We consider capital improvements to be accretive to revenue and not necessarily to net income.
Included in the capital improvement and development costs listed above are cap-
italized interest in the amount of $2.1 million, $1.2 million and $1.7 million for the
years ended December 31, 2014, 2013 and 2012, respectively, and capitalized
employee compensation in the amount of $2.0 million, $1.7 million and $1.5 mil-
lion for the years ended December 31, 2014, 2013 and 2012, respectively.
63
FORM 10-K Accretive Capital Improvements
Acquisition Related Improvements: Acquisition related improvements are capital
improvements to properties acquired during the preceding three years which were
anticipated at the time we acquired the properties. These types of improvements
were made in 2014 to The Paramount, Army Navy Club, 1775 Eye Street, NW,
Braddock Metro Center, 1227 25th Street and Spring Valley Shopping Center.
Expansions and Major Renovations: Expansion projects increase the rentable
area of a property, while major renovation projects are improvements sufficient
to increase the income otherwise achievable at a property. Expansions and
major renovations during 2014 included upgrades to heating/AC units at The
Kenmore; HVAC modifications, common area renovations and fitness center at
1600 Wilson Boulevard; HVAC modifications at 1140 Connecticut Avenue; exte-
rior plaza and common area renovations at 1220 19th Street; facade renovations
at Concord Centre; HVAC modifications at Braddock Place; HVAC modifications
and elevator modernizations at 2445 M Street and unit renovations at 3801
Connecticut Avenue and The Ashby at McLean.
Development/Redevelopment: Development costs represent expenditures for
ground up development of new operating properties. Redevelopment costs
represent expenditures for improvements intended to reposition properties
in their markets and increase income that would be otherwise achievable.
Development/redevelopment costs in each of the years presented primarily
include costs associated with the ground up development of The Maxwell and
redevelopment of the Silverline Center. We have substantially completed major
construction activities at The Maxwell.
Tenant Improvements: Tenant improvements are costs, such as space build-out,
associated with commercial lease transactions. Our average tenant improve-
ment costs per square foot of space leased, excluding first generation leases,
during the three years ended December 31, 2014 were as follows:
The $2.19 decrease in 2014 and the $2.70 increase in 2013 in tenant improve-
ment costs per square foot of office space leased was primarily due to leases
executed in 2013 requiring $5.9 million for tenant improvements at Braddock
Metro Center for a new tenant.
The $1.18 decrease in 2014 in tenant improvement costs per square foot of retail
space leased was primarily due to a lease executed with a single tenant requir-
ing $2.3 million in tenant improvements in 2013 at Bradlee Shopping Center.
The $0.80 decrease in 2013 in tenant improvement costs per square foot of
retail space leased was primarily due to a lease executed with a single tenant
requiring $0.9 million in tenant improvements in 2012 at Gateway Overlook.
Tenant improvement costs for retail tenants are substantially lower than for
office tenants because the improvements required for retail tenants tend to be
substantially less extensive than for office tenants.
Other Capital Improvements
Other capital improvements, also referred to as recurring capital improvements,
are those not included in the above categories. Over time these costs will be
recurring in nature to maintain a property’s income and value. In our multifam-
ily properties, these include new appliances, flooring, cabinets and bathroom
fixtures. These improvements, which are made as needed upon vacancy of
an apartment, totaled $1.1 million in 2014, averaging approximately $1,000 per
apartment for the 40% of apartments turned over relative to our total portfolio
of apartment units. In our commercial properties and residential properties
(aside from improvements related to apartment turnover), improvements include
installation of new heating and air conditioning equipment, asphalt replacement,
permanent landscaping, new lighting and new finishes. In addition, we incurred
repair and maintenance expense of $13.4 million during 2014 to maintain the
quality of our buildings.
Year Ended December 31,
Forward-Looking Statements
Office(1)
Retail
2014
$27.71
$ 5.87
2013
$29.90
$ 7.05
2012
$27.20
$ 7.85
(1) Excludes properties classified as discontinued operations.
This Form 10-K contains forward-looking statements which involve risks and
uncertainties. Such forward-looking statements include each of the statements
in “Item 1: Business” and “Item 7: Management’s Discussion and Analysis of
Financial Conditions and Results of Operations” concerning the Washington
metro region’s economy, gross regional product, unemployment and job growth
64
WASHINGTON REIT and real estate market performance. Such forward-looking statements also
include the following statements with respect to Washington REIT:
(m) our future capital requirements;
(n)
inflation;
(a) our intention to invest in properties that we believe will increase in income
(o) compliance with applicable laws, including those concerning the environ-
and value;
(b) our belief that external sources of capital will continue to be available and
that additional sources of capital will be available from the sale of common
shares or notes; and
(c) our belief that we have the liquidity and capital resources necessary to meet
our known obligations and to make additional property acquisitions and
capital improvements when appropriate to enhance long-term growth.
ment and access by persons with disabilities;
(p) governmental or regulatory actions and initiatives;
(q) changes in general economic and business conditions;
(r)
terrorist attacks or actions;
(s) acts of war;
(t) weather conditions and natural disasters;
(u)
failure to qualify as a REIT;
Forward-looking statements also include other statements in this report pre-
ceded by, followed by or that include the words “believe,” “expect,” “intend,”
“anticipate,” “potential,” “project,” “will” and other similar expressions.
We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for the
foregoing statements. The following important factors, in addition to those
discussed elsewhere in this Form 10-K, could affect our future results and
could cause those results to differ materially from those expressed in the
forward-looking statements:
(a)
the effect of credit and financial market conditions;
(b) the availability and cost of capital;
(c) fluctuations in interest rates;
(d) the economic health of our tenants;
(e)
the timing and pricing of lease transactions;
(f)
the economic health of the greater Washington Metro region, or other mar-
kets we may enter;
(g) changes in real estate and zoning laws and increases in property tax rates;
(h) the effects of changes in federal government spending;
(i)
the supply of competing properties;
(j) consumer confidence;
(k) unemployment rates;
(l) consumer tastes and preferences;
(v)
the availability of and our ability to attract and retain qualified personnel;
(w) the effects of changes in capital available to the technology and biotechnol-
ogy sectors of the economy; and
(x) other factors discussed under the caption “Risk Factors.”
We undertake no obligation to update our forward-looking statements or risk
factors to reflect new information, future events, or otherwise.
Funds From Operations
FFO is a widely used measure of operating performance for real estate compa-
nies. We provide FFO as a supplemental measure to net income calculated in
accordance with GAAP. Although FFO is a widely used measure of operating
performance for REITs, FFO does not represent net income calculated in accor-
dance with GAAP. As such, it should not be considered an alternative to net
income as an indication of our operating performance. In addition, FFO does not
represent cash generated from operating activities in accordance with GAAP,
nor does it represent cash available to pay distributions and should not be
considered as an alternative to cash flow from operating activities, determined in
accordance with GAAP, as a measure of our liquidity. The National Association
of Real Estate Investment Trusts, Inc. (“NAREIT”) defines FFO (April, 2002
White Paper) as net income (computed in accordance with GAAP) excluding
gains (or losses) from sales of property and impairments of depreciable real
estate, if any, plus real estate depreciation and amortization. We consider FFO
to be a standard supplemental measure for REITs because it facilitates an
understanding of the operating performance of our properties without giving
65
FORM 10-K 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 FFO more accurately provides investors an indication of our ability
to incur and service debt, make capital expenditures and fund other needs.
Our 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.
Our FFO and a reconciliation of FFO to net income for the three years ended
December 31, 2014 were as follows (in thousands):
ITEM 7A. 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 interest rate risk 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 lines of credit. We primar-
ily enter into debt obligations to support general corporate purposes, including
acquisition of real estate properties, capital improvements and working capital
needs. In the past we have used interest rate hedge agreements to hedge
against rising interest rates in anticipation of imminent refinancing or new
debt issuance.
Net income
Adjustments:
Year Ended December 31,
2014
2013
2012
$ 111,601
$ 37,346
$ 23,708
Depreciation and amortization
96,011
85,740
85,107
Discontinued operations, net of amounts
attributable to noncontrolling interests:
Depreciation and amortization
—
12,161
Gain on sale of real estate
(106,555)
(22,144)
18,827
(5,124)
Funds from operations
$ 101,057
$113,103
$122,518
66
WASHINGTON REIT The table below presents principal, interest and related weighted average fair value interest rates by year of maturity, with respect to debt outstanding on
December 31, 2014.
(In thousands)
2015
2016
2017
2018
2019
Thereafter
Total
Fair Value
Unsecured fixed rate debt
Principal
Interest payments
$150,000
$ 31,863
$ —
$ 27,850
$ —
$ 27,850
$ —
$27,850
$ —
$27,850
$600,000
$ 78,737
$750,000
$222,000
$782,042
Interest rate on debt maturities
5.45%
—%
—%
—%
—%
4.73%
4.87%
Unsecured variable rate debt
Principal
Variable interest rate on
debt maturities
Mortgages
Principal amortization(1)
(30 year schedule)
Interest payments(2)
Weighted average interest rate
on principal amortization
$ 5,000
$45,000
$ —
$ —
$ —
$ —
$ 50,000
$ 50,000
1.37%
1.37%
—%
—%
—%
—%
1.37%
$ 4,512
$ 21,538
$163,637
$ 16,483
$154,436
$ 6,616
$ 3,135
$ 5,089
$33,909
$ 3,627
$ 54,871
$ 6,649
$414,500
$ 60,002
$433,762
4.62%
5.70%
5.90%
4.87%
5.32%
3.95%
5.23%
(1) Excludes net discounts of $4.0 million at December 31, 2014.
(2)
Interest payments on our construction loan is based on LIBOR in effect on our borrowings outstanding at December 31, 2014.
67
FORM 10-K ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The financial statements and supplementary data appearing on pages 79 to 117
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 speci-
fied 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 Executive Vice President—Accounting and Administration,
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 con-
trol 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 Executive Vice President—Accounting and Administration, of the effective-
ness of the design and operation of our disclosure controls and procedures as of
December 31, 2014. Based on the foregoing, our Chief Executive Officer, Chief
Financial Officer and Executive Vice President—Accounting and Administration
(Principal Accounting Officer) concluded that our disclosure controls and proce-
dures were effective at a reasonable assurance level.
Internal Control over Financial Reporting
See the Report of Management in Item 8 of this Form 10-K.
See the Reports of Independent Registered Public Accounting Firm in Item 8 of
this Form 10-K.
During the three months ended December 31, 2014, there was no change in our
internal control over financial reporting that has materially affected, or is reason-
ably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
68
WASHINGTON REIT PART III
Certain information required by Part III is omitted from this Form 10-K in that we
will file a definitive proxy statement pursuant to Regulation 14A with respect to
our 2015 Annual Meeting (the “Proxy Statement”) no later than 120 days after
the end of the fiscal year covered by this Form 10-K, and certain information
included therein is incorporated herein by reference. Only those sections of the
Proxy Statement which specifically address the items set forth herein are incor-
porated by reference. In addition, we have adopted a code of ethics which can
be reviewed and printed from our website www.washreit.com.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
The information required by this Item is hereby incorporated herein by reference
to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated herein by reference
to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this Item by Item 403 of Regulation S-K is hereby incorporated herein by reference to the Proxy Statement.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders(1)
Equity compensation plans not approved by security holders
Total
Number of securities to be
issued upon exercise of outstanding
options, warrants and rights
Weighted-average exercise
price of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))
(a)
—
—
—
(b)
$—
$—
$—
(c)
845,130
—
845,130
(1) See note 7 to the consolidated financial statements for discussion of the equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is hereby incorporated herein by reference
to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is hereby incorporated herein by reference
to the Proxy Statement.
69
FORM 10-K PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A). The following documents are filed as part of this Form 10-K:
1. Financial Statements
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts
Schedule III—Consolidated Real Estate and Accumulated Depreciation
Page
76
77
78
79
80
82
83
85
113
114
All other schedules are omitted because they are either not required or the required information is shown in the financial statements or notes thereto.
3. Exhibits:
Exhibit
Number
Exhibit Description
Incorporated by Reference
Form
File Number
Exhibit
Filing Date
Filed
Herewith
Articles of Amendment and Restatement, effective as of May 17, 2011
DEF 14A 001-06622
Amended and Restated Bylaws of Washington Real Estate Investment Trust, as adopted on May 17, 2011
Indenture dated as of August 1, 1996 between Washington REIT and The First National Bank of Chicago
Form of 2028 Notes
Officers’ Certificate Establishing Terms of the 2014 Notes, dated December 8, 2003
Form of 2014 Notes
Form of 5.35% Senior Notes due May 1, 2015 dated April 26, 2005
8-K
8-K
8-K
8-K
8-K
8-K
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
B
3.3
(c)
99.1
4(a)
4(b)
4.2
4/1/2011
5/23/2011
8/13/1996
2/25/1998
12/11/2003
12/11/2003
4/26/2005
3.1
3.2
4.1
4.2
4.3
4.4
4.5
70
WASHINGTON REIT Exhibit
Number
Exhibit Description
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Officers Certificate establishing the terms of the 2012 and 2015 Notes, dated April 20, 2005
Form of 5.35% Senior Notes due May 1, 2015 dated October 6, 2005
Officers Certificate establishing the terms of the 2015 Notes, dated October 3, 2005
Supplemental Indenture by and between Washington REIT and the Bank of New York Trust Company, N.A.
dated as of July 3, 2007
Multifamily Note Agreement (Walker House Apartments) dated as of May 29, 2008, by and between
Washington REIT and Wells Fargo Bank, National Association
Multifamily Note Agreement (3801 Connecticut Avenue) dated as of May 29, 2008, by and between
Washington REIT and Wells Fargo Bank, National Association
Multifamily Note Agreement (Bethesda Hill Apartments) dated as of May 29, 2008, by and between
Washington REIT and Wells Fargo Bank, National Association
Form of 4.95% Senior Notes due October 1, 2020
Officers’ Certificate establishing the terms of the 4.95% Senior Notes due October 1, 2020
Amended and Restated Credit Agreement, dated as of May 17, 2012, by and among Washington Real
Estate Investment Trust, as borrower, the financial institutions party thereto as lenders, each of The Bank of
New York Mellon, Citibank, N.A. and Credit Suisse AG, Cayman Islands Branch as a documentation agent,
Wells Fargo Securities, LLC, as lead arranger and bookrunner, and Wells Fargo Bank, National Association,
as administrative agent.
Amended and Restated Credit Agreement, dated as of June 25, 2012, by and among Washington Real
Estate Investment Trust, as borrower, the financial institutions party thereto as lenders, SunTrust Robinson
Humphrey, Inc., as sole lead arranger and bookrunner, and SunTrust Bank, as administrative agent.
Form of 3.95% Senior Notes due October 15, 2022
Officers’ Certificate establishing the terms of 3.95% Notes due October 15, 2022
2001 Stock Option Plan
Share Purchase Plan
Supplemental Executive Retirement Plan
Description of Washington REIT Short-term and Long-term Incentive Plan
Description of Washington REIT Revised Trustee Compensation Plan
Supplemental Executive Retirement Plan
2007 Omnibus Long Term Incentive Plan
Deferred Compensation Plan for Officers dated January 1, 2007
Supplemental Executive Retirement Plan II dated May 23, 2007
10.10*
Amended Long Term Incentive Plan, effective January 1, 2008
10.11*
Form of Indemnification Agreement by and between Washington REIT and the indemnitee
Incorporated by Reference
Form
File Number
Exhibit
Filing Date
8-K
8-K
8-K
8-K
001-06622
001-06622
001-06622
001-06622
4.3
4.1
4.2
4.1
4/26/2005
10/6/2005
10/6/2005
7/5/2007
Filed
Herewith
10-Q
001-06622
4
8/8/2008
10-Q
001-06622
4.0
8/8/2008
10-Q
001-06622
4.0
8/8/2008
8-K
8-K
8-K
001-06622
001-06622
001-06622
4.1
4.2
4.1
9/30/2010
9/30/2010
5/18/2012
8-K
001-06622
4.1
6/27/2012
8-K
8-K
001-06622
001-06622
DEF 14A 001-06622
4.1
4.2
A
9/17/2012
9/17/2012
3/29/2001
10-Q
10-Q
10-K
10-K
10-K
001-06622
10(j)
11/14/2002
001-06622
10(k)
11/14/2002
001-06622
10(l)
3/16/2005
001-06622
10(m)
3/16/2005
001-06622
10(p)
3/16/2006
DEF 14A 001-06622
B
4/9/2007
10-K
10-K
10-Q
8-K
001-06622
10(gg)
2/29/2008
001-06622
10(hh)
2/29/2008
001-06622
10(ii)
5/9/2008
001-06622
10(nn)
7/27/2009
71
FORM 10-K Exhibit
Number
Exhibit Description
10.12*
Long Term Incentive Plan, effective January 1, 2009
10.13*
Short Term Incentive Plan, effective January 1, 2009
10.14*
Executive Stock Ownership Policy, adopted October 27, 2010
10.15*
Amendment to Deferred Compensation Plan for Officers, adopted October 27, 2010
10.16*
Long Term Incentive Plan, effective January 1, 2011
10.17*
Short Term Incentive Plan, effective January 1, 2011
10.18*
Short Term Incentive Plan, effective January 1, 2012
10.19*
10.20
Separation Agreement and General Release between Michael S. Paukstitus and Washington Real Estate
Investment Trust dated February 7, 2013
Sales Agency Financing Agreement, dated June 22, 2012 between Washington REIT and BNY Mellon
Capital Markets, LLC
10.21*
Amendment to Deferred Compensation Plan for Officers, adopted December 31, 2012
10.22*
Amended and restated change in control agreement dated February 27, 2013 with George F. McKenzie
10.23*
Amended and restated change in control agreement dated February 27, 2013 with William T. Camp
10.24*
Amended and restated change in control agreement dated February 27, 2013 with Laura M. Franklin
10.25*
Amended and restated change in control agreement dated February 25, 2013 with Thomas C. Morey
10.26*
Amended and restated change in control agreement dated February 26, 2013 with Thomas L. Regnell
10.27*
Amended and restated change in control agreement dated February 26, 2013 with James B. Cederdahl
10.28*
Change in control agreement dated February 26, 2013 with Paul S. Weinschenk
10.29*
Amendment to Deferred Compensation Plan for Officers, adopted February 13, 2013
10.30*
Amendment to Deferred Compensation Plan for Directors, adopted February 13, 2013
10.31*
Amendment to Short Term Incentive Plan, adopted as of January 22, 2013
Separation Agreement and General Release between George F. McKenzie and Washington Real Estate
Investment Trust dated July 23, 2013
Purchase and Sale Agreement, dated as of September 27, 2013, for 2440 M Street, Alexandria
Professional Center, 8301 Arlington Boulevard, 6565 Arlington Boulevard, Ashburn Farm Office Park I, II
and III, CentreMed I and II, Sterling Medical Office Building, 19500 at Riverside Office Park, Shady Grove
Medical Village II, 9707 Medical Center Drive, 15001 and 15005 Shady Grove Road, Woodholme Center,
and Woodholme Medical Office Building
10.32*
10.33
10.34
10.35
10.36
Incorporated by Reference
File Number
Exhibit
Filing Date
Filed
Herewith
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
10.28
10.29
10.31
10.32
10.34
10.35
10.38
2/26/2010
2/26/2010
11/2/2010
11/2/2010
5/6/2011
5/6/2011
5/7/2012
001-06622
10.1
2/13/2013
Form
10-K
10-K
8-K
8-K
10-Q
10-Q
10-Q
8-K
8-K
001-06622
1.1
6/22/2012
10-K
10-K
10-K
10-K
10-K
10-K
10-K
10-K
10-Q
10-Q
10-Q
10-Q
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
2/27/2013
2/27/2013
2/27/2013
2/27/2013
2/27/2013
2/27/2013
2/27/2013
2/27/2013
5/9/2013
5/9/2013
5/9/2013
7/31/2013
8-K
001-06622
10.49
10/3/2013
Purchase and Sale Agreement, dated as of September 27, 2013, for 4661 Kenmore Avenue
Purchase and Sale Agreement, dated as of September 27, 2013, for Woodburn Medical Park I and II
Purchase and Sale Agreement, dated as of September 27, 2013, for Prosperity Medical Center I, II and III
8-K
8-K
8-K
001-06622
001-06622
001-06622
10.37*
Amended and Restated Deferred Compensation Plan for Directors, effective October 22, 2013
10-Q
001-06622
72
10.50
10.51
10.52
10.53
10/3/2013
10/3/2013
10/3/2013
11/1/2013
WASHINGTON REIT Exhibit
Number
Exhibit Description
10.38*
Employment Agreement dated August 19, 2013 with Paul T. McDermott
10.39*
Change in control agreement dated October 1, 2013 with Paul T. McDermott
10.40*
Amendment to Deferred Compensation Plan for Officers, adopted February 18, 2014
10.41*
Amendment to Deferred Compensation Plan for Directors as Amended and Restated, adopted
February 18, 2014
10.42*
Short Term Incentive Compensation Plan (effective January 1, 2014)
10.43*
Change in control agreement dated April 21, 2014 with Thomas Q. Bakke
10.44*
Separation Agreement and General Release between James B. Cederdahl and Washington Real Estate
Investment Trust dated July 2, 2014
10.45*
Long Term Incentive Plan (effective January 1, 2014)
10.46*
Amendment to Short Term Incentive Plan (effective January 1, 2014)
10.47*
10.48*
Separation Agreement and General Release between James B. Cederdahl and Washington Real Estate
Investment Trust dated July 2, 2014
Separation Agreement and General Release between Thomas L. Regnell and Washington Real Estate
Investment Trust dated October 8, 2014
10.49*
Executive Officer Severance Pay Plan, adopted August 4, 2014
10.50*
10.51*
Separation Agreement and General Release between William T. Camp and Washington Real Estate
Investment Trust dated December 17, 2014
Separation Agreement and General Release between Laura M. Franklin and Washington Real Estate
Investment Trust dated February 18, 2015
10.52*
Change in control agreement dated April 1, 2013 with Edward J. Murn IV
10.53*
Offer Letter to Thomas Q. Bakke
10.54*
Description of Washington REIT Trustee Compensation Plan, effective January 1, 2015
10.55*
Offer Letter to Stephen E. Riffee
10.56*
Change in control agreement dated February 27, 2015 with Stephen E. Riffee
12
21
23
24
31.1
31.2
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended (“the Exchange Act”)
Certification of the Executive Vice President—Accounting and Administration pursuant to Rule 13a-14(a)
of the Exchange Act
31.3
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
Incorporated by Reference
Form
File Number
Exhibit
Filing Date
Filed
Herewith
10-Q
10-K
10-K
10-K
10-Q
10-Q
8-K
10-Q
10-Q
8-K
001-06622
001-06622
001-06622
001-06622
10.54
10.44
10.45
10.46
11/1/2013
3/3/2014
3/3/2014
3/3/2014
001-06622
001-06622
10.47
10.48
5/7/2014
5/7/2014
001-06622
10.1
7/7/2014
001-06622
001-06622
10.50
10.51
8/5/2014
8/5/2014
001-06622
10.1
7/7/2014
8-K
001-06622
10.1
10/6/2014
10-Q
001-06622
10.54
10/30/2014
8-K
001-06622
10.1
12/18/2014
8-K
001-06622
10.1
2/19/2015
X
X
X
X
X
X
X
X
X
X
X
X
73
FORM 10-K Exhibit
Number
32
101
Exhibit Description
Certification of the Chief Executive Officer, Executive Vice President—Accounting and Administration
(Principal Accounting Officer) and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act
and 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from our Annual Report on Form 10-K for the year ended December 31, 2014
formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Consolidated Balance Sheets, (ii)
the Consolidated Statements of Income, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the
Consolidated Statements of Cash Flows, and (v) notes to these consolidated financial statements.
*Management contracts or compensation plans or arrangements in which trustees or executive officers are eligible to participate.
Incorporated by Reference
Form
File Number
Exhibit
Filing Date
Filed
Herewith
X
X
In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of long-term debt of Washington REIT or its
subsidiaries are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.
74
WASHINGTON REIT SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 2, 2015
WASHINGTON REAL ESTATE INVESTMENT TRUST
By: /s/ Paul T. McDermott
Paul T. McDermott
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
Title
Date
Signature
Title
Date
/s/ Charles T. Nason*
Chairman, Trustee
March 2, 2015
/s/ Thomas Edgie Russell, III*
Trustee
March 2, 2015
Charles T. Nason
/s/ Paul T. McDermott
Paul T. McDermott
President, Chief Executive
Officer and Trustee
Thomas Edgie Russell, III
March 2, 2015
/s/ Wendelin A. White*
Trustee
March 2, 2015
Wendelin A. White
/s/ Benjamin S. Butcher*
Trustee
March 2, 2015
/s/ Anthony L. Winns*
Trustee
March 2, 2015
Benjamin S. Butcher
Anthony L. Winns
/s/ William G. Byrnes*
Trustee
March 2, 2015
/s/ William T. Camp
William G. Byrnes
/s/ Edward S. Civera*
Trustee
March 2, 2015
Edward S. Civera
/s/ John P. McDaniel*
Trustee
March 2, 2015
John P. McDaniel
/s/ Thomas H. Nolan, Jr.*
Trustee
March 2, 2015
Thomas H. Nolan, Jr.
William T. Camp
/s/ Laura M. Franklin
Laura M. Franklin
*By: /s/ Laura M. Franklin
through power of attorney
Laura M. Franklin
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
March 2, 2015
Executive Vice President—
Accounting and Administration
(Principal Accounting Officer)
March 2, 2015
75
FORM 10-K
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Washington Real Estate Investment Trust (“Washington REIT”)
is responsible for establishing and maintaining adequate internal control over
financial reporting and for the assessment of the effectiveness of internal con-
trols over financial reporting. Washington REIT’s internal control system over
financial reporting is a process designed under the supervision of Washington
REIT’s principal executive and principal financial officers to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the consolidated financial statements in accordance with U.S. generally
accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limita-
tions. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation
and presentation. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions.
In connection with the preparation of Washington REIT’s annual consolidated
financial statements, management has undertaken an assessment of the
effectiveness of Washington REIT’s internal control over financial reporting
as of December 31, 2014, based on criteria established in Internal Control-
Integrated Framework issued in 2013 by the Committee of Sponsoring
Organizations of the Treadway Commission (the 2013 COSO Framework).
Management’s assessment included an evaluation of the design of Washington
REIT’s internal control over financial reporting and testing of the operational
effectiveness of those controls.
Based on this assessment, management has concluded that as of
December 31, 2014, Washington REIT’s internal control over financial reporting
was effective at a reasonable assurance level regarding the reliability of finan-
cial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Ernst & Young LLP, the independent registered public accounting firm that
audited Washington REIT’s consolidated financial statements included in this
report, has issued an unqualified opinion on the effectiveness of Washington
REIT’s internal control over financial reporting, a copy of which appears on
page 77 of this annual report.
76
WASHINGTON REIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
Washington Real Estate Investment Trust
We have audited the accompanying consolidated balance sheets of Washington
Real Estate Investment Trust and Subsidiaries as of December 31, 2014 and
2013, and the related consolidated statements of income, shareholders’ equity,
and cash flows for each of the three years in the period ended December 31,
2014. Our audits also included the financial statement schedules listed in the
Index at Item 15. These financial statements and schedules are the responsibil-
ity of the Company’s management. Our responsibility is to express an opinion
on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Washington Real
Estate Investment Trust and Subsidiaries at December 31, 2014 and 2013, and
the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2014, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related finan-
cial statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the informa-
tion set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Washington Real Estate
Investment Trust and Subsidiaries’ internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 Framework) and our report dated March 2, 2015
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
March 2, 2015
77
FORM 10-K REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
Washington Real Estate Investment Trust
We have audited Washington Real Estate Investment Trust and Subsidiaries’
internal control over financial reporting as of December 31, 2014, based on crite-
ria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 Framework)
(the COSO criteria). Washington Real Estate Investment Trust’s management is
responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal con-
trol over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we con-
sidered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide rea-
sonable assurance that transactions are recorded as necessary to permit prepa-
ration of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Washington Real Estate Investment Trust and Subsidiaries main-
tained, in all material respects, effective internal control over financial reporting
as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance
sheets of Washington Real Estate Investment Trust and Subsidiaries as of
December 31, 2014 and 2013, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2014 of Washington Real Estate Investment Trust
and Subsidiaries and our report dated March 2, 2015 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
March 2, 2015
78
WASHINGTON REIT CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Assets
Land
Income producing property
Accumulated depreciation and amortization
Net income producing property
Properties under development or held for future development
Total real estate held for investment, net
Investment in real estate sold or held for sale, net
Cash and cash equivalents
Restricted cash
Rents and other receivables, net of allowance for doubtful accounts of $3,392 and $6,783, respectively
Prepaid expenses and other assets
Other assets related to properties sold or held for sale
Total assets
Liabilities
Notes payable
Mortgage notes payable
Lines of credit
Accounts payable and other liabilities
Advance rents
Tenant security deposits
Other liabilities related to properties sold or held for sale
Total liabilities
Equity
Shareholders’ equity
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding
Shares of beneficial interest; $0.01 par value; 100,000 shares authorized: 67,819 and 66,531 shares
issued and outstanding at December 31, 2014 and 2013, respectively
Additional paid in capital
Distributions in excess of net income
Total shareholders’ equity
Noncontrolling interests in subsidiaries
Total equity
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated financial statements.
December 31,
2014
2013
$ 543,546
1,927,407
2,470,953
(640,434)
1,830,519
76,235
1,906,754
—
15,827
10,299
59,745
121,082
—
$ 426,575
1,675,652
2,102,227
(565,342)
1,536,885
61,315
1,598,200
79,901
130,343
9,189
48,756
105,004
4,100
$2,113,707
$1,975,493
$ 747,208
418,525
50,000
54,318
12,528
8,899
—
1,291,478
$ 846,703
294,671
—
51,742
13,529
7,869
1,533
1,216,047
—
—
678
1,184,395
(365,518)
819,555
2,674
822,229
665
1,151,174
(396,880)
754,959
4,487
759,446
$2,113,707
$1,975,493
79
FORM 10-K CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Revenue
Real estate rental revenue
Expenses
Utilities
Real estate taxes
Repairs and maintenance
Property administration
Property management
Operating services and common area maintenance
Other real estate expenses
Depreciation and amortization
Acquisition costs
General and administrative
Other operating income
Gain on sale of real estate
Real estate operating income
Other income (expense)
Interest expense
Other income
Loss on extinguishment of debt
Income (loss) from continuing operations
Discontinued operations:
Income from operations of properties sold or held for sale
Gain on sale of real estate
Net income
Less: Net loss attributable to noncontrolling interests in subsidiaries
Net income attributable to the controlling interests
80
Year Ended December 31,
2014
2013
2012
$288,637
$263,024
$254,794
18,056
33,436
13,375
11,703
8,757
15,068
3,300
96,011
5,710
19,761
16,311
29,052
12,261
10,155
8,255
13,469
3,790
85,740
1,265
17,535
225,177
197,833
570
64,030
(59,785)
825
—
(58,960)
5,070
546
105,985
111,601
38
$111,639
—
65,191
(63,573)
926
(2,737)
(65,384)
(193)
15,395
22,144
37,346
—
15,781
27,064
11,339
9,248
8,503
12,358
2,252
85,107
234
15,488
187,374
—
67,420
(60,627)
975
—
(59,652)
7,768
10,816
5,124
23,708
—
$ 37,346
$ 23,708
WASHINGTON REIT CONSOLIDATED STATEMENTS OF INCOME (continued)
(in thousands, except per share data)
Basic net income attributable to the controlling interests per share
Continuing operations
Discontinued operations, including gain on sale of real estate
Net income attributable to the controlling interests per share
Diluted net income attributable to the controlling interests per share
Continuing operations
Discontinued operations, including gain on sale of real estate
Net income attributable to the controlling interests per share
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
See accompanying notes to the consolidated financial statements.
Year Ended December 31,
2014
2013
2012
$ 0.08
1.59
$ 1.67
$ 0.08
1.59
$ 1.67
66,795
66,837
$ —
0.55
$ 0.55
$ —
0.55
$ 0.55
66,580
66,580
$ 0.11
0.24
$ 0.35
$ 0.11
0.24
$ 0.35
66,239
66,376
81
FORM 10-K CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Balance, December 31, 2011
Net income attributable to the controlling interests
Contributions from noncontrolling interest
Dividends
Shares issued under Dividend Reinvestment Program
Share options exercised
Share grants, net of share grant amortization and forfeitures
Shares
66,265
—
—
—
55
45
72
Shares of
Beneficial
Interest
at Par Value
Additional
Paid in
Capital
Distributions
in Excess of
Net Income
Attributable to
the Controlling
Interests
Total
Shareholders’
Equity
Non- controlling
Interests in
Subsidiaries
Total
Equity
$662
$1,138,478
$ (280,096)
$859,044
$ 3,788
$862,832
—
—
—
1
—
1
—
—
—
1,315
1,153
4,569
23,708
23,708
—
—
(97,734)
(97,734)
—
—
—
1,316
1,153
4,570
—
298
—
—
—
—
Balance, December 31, 2012
66,437
664
1,145,515
(354,122)
792,057
4,086
Net income attributable to the controlling interests
Contributions from noncontrolling interest
Dividends
Share grants, net of share grant amortization and forfeitures
—
—
—
94
—
—
—
1
—
—
—
37,346
37,346
—
—
(80,104)
(80,104)
5,659
—
5,660
—
401
—
—
Balance, December 31, 2013
66,531
665
1,151,174
(396,880)
754,959
4,487
—
—
—
—
—
11
2
—
—
—
—
—
30,679
2,542
111,639
111,639
—
—
—
—
—
—
(80,277)
(80,277)
—
—
30,690
2,544
—
(38)
(1,784)
9
—
—
—
$678
$1,184,395
$ (365,518)
$819,555
$ 2,674
$822,229
23,708
298
(97,734)
1,316
1,153
4,570
796,143
37,346
401
(80,104)
5,660
759,446
111,639
(38)
(1,784)
9
(80,277)
30,690
2,544
Net income attributable to the controlling interests
Net income attributable to noncontrolling interests
Distributions to noncontrolling interests
Contributions from noncontrolling interest
Dividends
Equity offerings, net of issuance costs
Share grants, net of share grant amortization and forfeitures
Balance, December 31, 2014
See accompanying notes to the consolidated financial statements.
—
—
—
—
—
1,125
163
67,819
82
WASHINGTON REIT CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of real estate
Depreciation and amortization, including amounts in discontinued operations
Provision for losses on accounts receivable
Real estate impairment, including amounts in discontinued operations
Share-based compensation expense
Amortization of debt premiums, discounts and related financing costs
Loss on extinguishment of debt, net
Changes in other assets
Changes in other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Real estate acquisitions, net
Capital improvements to real estate
Development in progress
Net cash received from sale of real estate
Real estate deposits, net
Cash held in replacement reserve escrows
Non-real estate capital improvements
Year Ended December 31,
2014
2013
2012
$ 111,601
$ 37,346
$ 23,708
(106,555)
96,011
1,402
—
4,995
3,588
—
(23,306)
(7,035)
80,701
(194,536)
(57,810)
(43,264)
190,864
—
(1,417)
(1,719)
(22,144)
97,901
3,772
—
6,246
4,158
2,737
(10,591)
(6,107)
113,318
(48,200)
(55,829)
(15,826)
313,765
(3,900)
—
(162)
(5,124)
103,934
3,847
2,097
5,856
3,867
—
(8,458)
1,721
131,448
(52,142)
(51,180)
(6,494)
21,825
(250)
—
(555)
Net cash (used in) provided by investing activities
(107,882)
189,848
(88,796)
Cash flows from financing activities
Line of credit borrowings (repayments), net
Dividends paid
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Proceeds from dividend reinvestment program
Borrowing under construction loan
Principal payments—mortgage notes payable
50,000
(80,277)
9
(3,454)
—
20,393
(3,954)
—
(80,104)
401
—
—
7,297
(58,679)
(99,000)
(97,734)
298
—
1,316
—
(85,667)
83
FORM 10-K CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Net proceeds from debt offering
Payment of financing costs
Net proceeds from equity offerings
Notes payable repayments
Net proceeds from exercise of share options
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest expense
Cash paid for income taxes
Increase in accrued capital improvements and development costs
Mortgage notes payable assumed in connection with the acquisition of real estate
See accompanying notes to the consolidated financial statements.
2014
—
(742)
30,690
(100,000)
—
(87,335)
(114,516)
130,343
Year Ended December 31,
2013
—
(843)
—
(60,000)
—
(191,928)
111,238
19,105
2012
298,314
(4,678)
—
(50,000)
1,153
(35,998)
6,654
12,451
$ 15,827
$ 130,343
$ 19,105
$ 58,023
$ 156
$ (4,154)
$ 100,861
$ 62,744
$ 54
$ (328)
$ —
$ 58,282
$ 84
$ (2,128)
$ —
84
WASHINGTON REIT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2014, 2013 and 2012
NOTE 1. NATURE OF BUSINESS
Washington Real Estate Investment Trust (“Washington REIT”), a Maryland real
estate investment trust, is a self-administered, self-managed equity real estate
investment trust, successor to a trust organized in 1960. Our business consists
of the ownership and operation of income-producing real estate properties in
the greater Washington Metro region. We own a diversified portfolio of office
buildings, multifamily buildings and retail centers.
Disposition Date
Property
Type
Gain on Sale
January 21, 2014
Medical Office Portfolio
Transactions III & IV(1)
Medical Office
$105,985
May 2, 2014
5740 Columbia Road
Retail
Total 2014
March 19, 2013
Atrium Building
Office
570
$106,555
$ 3,195
November 2013
Medical Office Portfolio
Transactions I & II(2)
Medical Office/Office
18,949
Federal Income Taxes
Total 2013
We believe that we qualify as a REIT under Sections 856-860 of the Internal
Revenue 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 (which is, generally, our ordinary taxable income, with certain
modifications), excluding any net capital gains and any deductions for dividends
paid to our shareholders on an annual basis. When selling a property, we gen-
erally 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, pay-
ing the tax on the gain deemed distributed and allocating the tax paid as a credit
to our shareholders. During the three years ended December 31, 2014, we sold
the following properties (in thousands):
August 31, 2012
1700 Research Boulevard
Office
December 20, 2012 Plumtree Medical Center
Medical Office
Total 2012
$ 22,144
$ 3,724
1,400
$ 5,124
(1) Woodburn Medical Park I and II and Prosperity Medical Center I, II and III.
(2) 2440 M Street, 15001 Shady Grove Road, 15505 Shady Grove Road, 19500 at Riverside Park (formerly
Lansdowne Medical Office Building), 9707 Medical Center Drive, CentreMed I and II, 8301 Arlington
Boulevard, Sterling Medical Office Building, Shady Grove Medical Village II, Alexandria Professional Center,
Ashburn Farm Office Park I, Ashburn Farm Office Park II, Ashburn Farm Office Park III, Woodholme Medical
Office Building, two office properties (6565 Arlington Boulevard and Woodholme Center) and undeveloped
land at 4661 Kenmore Avenue.
We reinvested a portion of the Medical Office Portfolio sales proceeds in
replacement properties through deferred tax exchanges.
Generally, and subject to our ongoing qualification as a REIT, no provisions for
income taxes are necessary except for taxes on undistributed taxable income
and taxes on the income generated by our taxable REIT subsidiaries (“TRS’s”).
Our TRS’s are subject to corporate federal and state income tax on their taxable
income at regular statutory rates, or as calculated under the alternative mini-
mum tax, as appropriate. As of December 31, 2014 and December 31, 2013, our
TRS’s had no net deferred tax assets and a net deferred tax liability of $0.6 mil-
lion. These deferred tax liabilities are primarily related to temporary differences
in the timing of the recognition of revenue, amortization and depreciation. During
2011, we recognized a $14.5 million impairment charge at Dulles Station, Phase
II, a development property held by one of our TRS’s. The impairment charge
created a deferred tax asset of $5.7 million at this TRS, but we have determined
85
FORM 10-K that it is more likely than not that this deferred tax asset will not be realized. We
have therefore recorded a valuation allowance for the full amount of the deferred
tax asset related to the impairment charge at Dulles Station, Phase II.
The following is a breakdown of the taxable percentage of our dividends for
these years ended December 31, 2014, 2013 and 2012, (unaudited):
Ordinary income
Return of capital
Qualified dividends
Unrecaptured Section 1250 gain
Capital gain
2014
40%
52%
—%
8%
—%
2013
62%
38%
—%
—%
—%
2012
72%
26%
—%
2%
—%
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND BASIS OF PRESENTATION
Principles of Consolidation and Basis of Presentation
The accompanying audited consolidated financial statements include the con-
solidated accounts of Washington REIT, our majority-owned subsidiaries and
entities in which Washington REIT has a controlling interest, including where
Washington REIT has been determined to be a primary beneficiary of a variable
interest entity (“VIE”). See note 3 for additional information on the properties for
which there is a noncontrolling interest. All intercompany balances and transac-
tions have been eliminated in consolidation.
We have prepared the accompanying audited consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles (“GAAP”) requires management to make certain esti-
mates 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.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU
No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals
of Components of an Entity, which changes the requirements for reporting
discontinued operations. Specifically, under this ASU only those disposals of
components of an entity that represent a strategic shift that has (or will have) a
major effect on an entity’s operations and financial results will be reported as
discontinued operations in the financial statements. The primary impact of this
ASU is that we are no longer required to report the disposal of every operating
property in discontinued operations. Adoption of this ASU is required for all dis-
posals (or classifications as held for sale) of components of an entity that occur
within annual periods beginning on or after December 15, 2014, and interim
periods within those years. Early adoption is permitted, but only for disposals (or
classifications as held for sale) that have not been reported in financial state-
ments previously issued or available for issuance. We early adopted this ASU
effective on January 1, 2014.
In June 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts
with Customers, which creates a single source of revenue guidance. The new
standard provides accounting guidance for all revenue arising from contracts
with customers and affects all entities that enter into contracts to provide goods
or services to their customers (unless the contracts are in the scope of other
U.S. generally accepted accounting principles (“GAAP”) requirements, such as
the leasing literature). The guidance also provides a model for the measurement
and recognition of gains and losses on the sale of certain nonfinancial assets,
such as property and equipment, including real estate. The new standard
is effective for public entities for fiscal years beginning after December 15,
2016 and for interim periods therein. Early adoption is not permitted for public
entities. We are currently evaluating the impact the new standard may have on
Washington REIT.
Revenue Recognition
We lease multifamily properties under operating leases with terms of gener-
ally one year or less. We lease commercial properties (our office and retail
segments) under operating leases with an average term of seven years.
Substantially all commercial leases contain fixed escalations or, in some
instances, changes based on the Consumer Price Index, which occur at spec-
ified times during the term of the lease. We recognize rental income and rental
86
WASHINGTON REIT abatements from our multifamily and commercial leases when earned on a
straight-line basis over the lease term. Recognition of rental income commences
when control of the facility has been given to the tenant.
We recognize sales of real estate at closing only when sufficient down payments
have been obtained, possession and other attributes of ownership have been
transferred to the buyer and we have no significant continuing involvement.
Deferred Leasing Costs
We capitalize and amortize costs associated with the successful negotiation of
leases, both external commissions and internal direct costs, on a straight-line
basis over the terms of the respective leases. We record the amortization of
deferred leasing costs as amortization expense. If an applicable lease termi-
nates prior to the expiration of its initial lease term, we write off the carrying
amount of the costs to amortization expense.
We recognize cost reimbursement income from pass-through expenses on
an accrual basis over the periods in which the expenses were incurred. Pass-
through expenses are comprised of real estate taxes, operating expenses and
common area maintenance costs which are reimbursed by tenants in accor-
dance with specific allowable costs per tenant lease agreements.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily represents amounts accrued and unpaid from ten-
ants in accordance with the terms of the respective leases, subject to our revenue
recognition policy. We review receivables monthly and establish reserves when,
in the opinion of management, collection of the receivable is doubtful. We estab-
lish reserves for tenants whose rent payment history or financial condition casts
doubt upon the tenants’ ability to perform under their lease obligations. When we
determine the collection of a receivable to be doubtful in the same quarter that
we established the receivable, we recognize the allowance for that receivable
as an offset to real estate revenues. When we determine a receivable that was
initially established in a prior quarter to be doubtful, we recognize the allowance
as an operating expense. In addition to rents due currently, accounts receivable
include amounts representing minimal rental income accrued on a straight-line
basis to be paid by tenants over the remaining term of their respective leases.
Our accounts receivable balances include $4.4 million and $6.2 million of notes
receivable as of December 31, 2014 and 2013, respectively.
Deferred Financing Costs
We capitalize and amortize external costs associated with the issuance or assump-
tion of mortgages, notes payable and fees associated with the lines of credit using
the effective interest rate method or the straight-line method which approximates
the effective interest rate method, over the estimated life of the related debt. We
record the amortization of deferred financing costs as interest expense.
We capitalize and amortize against revenue leasing incentives associated with
the successful negotiation of leases on a straight-line basis over the terms of the
respective leases. We record the amortization of deferred leasing incentives as
a reduction of revenue. If an applicable lease terminates prior to the expiration of
its initial lease term, we write off the carrying amount of the costs as a reduction
of revenue.
Real Estate and Depreciation
We depreciate buildings on a straight-line basis over estimated useful lives
ranging from 28 to 50 years. We capitalize all capital improvements associated
with replacements, improvements or major repairs to real property that extend
its useful life and depreciate them using the straight-line method over their esti-
mated useful lives ranging from 3 to 30 years. We also capitalize costs incurred
in connection with our development projects, including capitalizing interest and
other internal costs during periods in which qualifying expenditures have been
made and activities necessary to get the development projects ready for their
intended use are in progress. Capitalization of these costs begin when the
activities and related expenditures commence and cease when the project is
substantially complete and ready for its intended use, at which time the project
is placed in service and depreciation commences.
In addition, we capitalize tenant leasehold improvements when certain
criteria are met, including when we supervise construction and will own the
improvements. We depreciate all tenant improvements over the shorter of the
useful life of the improvements or the term of the related tenant lease. Real
estate depreciation expense from continuing operations was $71.4 million,
$63.4 million, $61.1 million during the years ended December 31, 2014, 2013,
2012, respectively.
87
FORM 10-K We charge maintenance and repair costs that do not extend an asset’s life to
expense as incurred.
We capitalize interest costs incurred on borrowing obligations while qualifying
assets are being readied for their intended use. We amortize capitalized interest
over the useful life of the related underlying assets upon those assets being
placed into service. Interest expense from continuing operations and interest capi-
talized to real estate assets related to development and major renovation activities
for the three years ended December 31, 2014 were as follows (in thousands):
Total interest expense from
continuing operations
Capitalized interest
Interest expense from continuing
Year Ended December 31,
2014
2013
2012
$61,927
2,142
$64,809
1,236
$62,315
1,688
operations, net of capitalized interest
$59,785
$63,573
$60,627
We recognize impairment losses on long-lived assets used in operations,
development assets or land held for future development, if indicators of impair-
ment are present and the net undiscounted cash flows estimated to be gener-
ated by those assets are less than the assets’ carrying amount and estimated
undiscounted cash flows associated with future development expenditures. If
such carrying amount is in excess of the estimated cash flows from the oper-
ation and disposal of the property, we would recognize an impairment loss
equivalent to an amount required to adjust the carrying amount to its estimated
fair value, calculated in accordance with current GAAP fair value provisions
(see note 3). Assets held for sale are recorded at the lower of cost or fair value
less costs to sell.
We record acquired or assumed assets, including physical assets and in-place
leases, and liabilities, based on their fair values. We determine the fair values
of acquired buildings on an “as-if-vacant” basis considering a variety of factors,
including the replacement cost of the property, estimated rental and absorption
rates, estimated future cash flows and valuation assumptions consistent with
current market conditions. We determine the fair value of land acquired based
on comparisons to similar properties that have been recently marketed for sale
or sold.
The fair value of in-place leases consists of the following components—(a) the
estimated cost to us to replace the leases, including foregone rents during the
period of finding a new tenant and foregone recovery of tenant pass-throughs
(referred to as “absorption cost”); (b) the estimated cost of tenant improvements,
and other direct costs associated with obtaining a new tenant (referred to as
“tenant origination cost”); (c) estimated leasing commissions associated with
obtaining a new tenant (referred to as “leasing commissions”); (d) the above/at/
below market cash flow of the leases, determined by comparing the projected
cash flows of the leases in place, including consideration of renewal options,
to projected cash flows of comparable market-rate leases (referred to as “net
lease intangible”); and (e) the value, if any, of customer relationships, deter-
mined based on our evaluation of the specific characteristics of each tenant’s
lease and our overall relationship with the tenant (referred to as “customer
relationship value”). We have attributed no value to customer relationships as of
December 31, 2014 and 2013.
We discount the amounts used to calculate net lease intangibles using an
interest rate which reflects the risks associated with the leases acquired. We
include tenant origination costs in income producing property on our balance
sheets and amortize the tenant origination costs as depreciation expense on a
straight-line basis over the remaining life of the underlying leases. We classify
leasing commissions and absorption costs as other assets and amortize leasing
commissions and absorption costs as amortization expense on a straight-line
basis over the remaining life of the underlying leases. We classify net lease
intangible assets as other assets and amortize them on a straight-line basis
as a decrease to real estate rental revenue over the remaining term of the
underlying leases. We classify net lease intangible liabilities as other liabilities
and amortize them on a straight-line basis as an increase to real estate rental
revenue over the remaining term of the underlying leases. We classify below
market net lease intangible liabilities as other liabilities and amortize them on a
straight-line basis as an increase to real estate rental revenue over the remain-
ing term of the underlying leases. If any of the fair value of below market lease
intangibles includes fair value associated with a renewal option, such amounts
are not amortized until the renewal option is executed, else the related value is
expensed at that time. Should a tenant terminate its lease, we accelerate the
amortization of the unamortized portion of the tenant origination cost, leasing
commissions, absorption costs and net lease intangible associated with that
lease, over its new, shorter term.
88
WASHINGTON REIT Balances, net of accumulated depreciation or amortization, as appropriate, of the components of the fair value of in-place leases at December 31, 2014 and 2013
were as follows (in thousands):
Tenant origination costs
Leasing commissions/absorption costs
Net lease intangible assets
Net lease intangible liabilities
Below-market ground lease intangible asset
2014
2013
December 31,
Gross
Carrying Value
Accumulated
Amortization
$56,327
$35,463
93,729
19,724
34,027
12,080
60,289
9,495
20,974
1,335
Net
$20,864
33,440
10,229
13,053
10,745
Gross
Carrying Value
Accumulated
Amortization
$47,697
$29,653
78,629
12,495
26,348
12,080
48,376
7,008
19,403
1,145
Net
$18,044
30,253
5,487
6,945
10,935
Amortization of these combined components from continuing operations was
$20.3 million, $17.3 million and $19.6 million during the three years ended
December 31, 2014, 2013 and 2012, respectively.
Amortization of these combined components from continuing operations over
the next five years is projected to be as follows (in thousands):
2015
2016
2017
2018
2019
$17,260
13,234
9,465
5,844
3,358
Discontinued Operations
We classify properties as held for sale when they meet the necessary criteria,
which include: (a) senior management commits to and actively embarks upon
a plan to sell the assets, (b) the sale is expected to be completed within one
year under terms usual and customary for such sales and (c) 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. We generally consider
that a property has met these criteria when a sale of the property has been
approved by the Board of Trustees, or a committee with authorization from the
Board, there are no known significant contingencies related to the sale and
management believes it is probable that the sale will be completed within one
year. Depreciation on these properties is discontinued at the time they are clas-
sified as held for sale, but operating revenues, operating expenses and interest
expense continue to be recognized until the date of sale.
Under ASU 2014-08, which we adopted as of January 1, 2014, 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 consol-
idated statements of income if the dispositions represent a strategic shift that
has (or will have) a major effect on our operations and financial results. Interest
on debt that can be identified as specifically attributed to these properties is
included in discontinued operations. If the dispositions do not represent a stra-
tegic 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 income for all periods presented. The provisions of ASU 2014-08
apply only to properties classified as held for sale or sold after our adoption
date of January 1, 2014.
Segments
We evaluate performance based upon operating income from the combined
properties in each segment. Our reportable operating segments are consoli-
dations of similar properties. GAAP requires that segment disclosures present
the measure(s) used by the chief operating decision maker for purposes of
89
FORM 10-K assessing segments’ performance. Net operating income is a key measurement
of our segment profit and loss. Net operating income is defined as segment real
estate rental revenue less segment real estate expenses.
Cash and Cash Equivalents
Cash and cash equivalents include cash and commercial paper with origi-
nal maturities of 90 days or less. Washington REIT maintains cash deposits
with financial institutions that at times exceed applicable insurance limits.
Washington REIT reduces this risk by maintaining such deposits with high qual-
ity financial institutions that management believes are credit-worthy.
Restricted Cash
Restricted cash includes funds escrowed for tenant security deposits, real
estate tax, insurance and mortgage escrows and escrow deposits required by
lenders on certain of our properties to be used for future building renovations or
tenant improvements.
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 divi-
dends, and are therefore considered participating securities. We compute basic
earnings per share by dividing net income attributable to the controlling interest
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” under the two-class 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 employee stock options based on the treasury stock method and our perfor-
mance share units under the contingently issuable method. The dilutive earn-
ings per share calculation also considers our operating partnership units.
Stock Based Compensation
We currently maintain equity based compensation plans for trustees, officers
and employees and previously maintained option plans for trustees, officers
and employees.
We recognize compensation expense for service-based share awards ratably
over the period from the service inception date through the vesting period based
on the fair market value of the shares on the date of grant. We initially measure
compensation expense for awards with performance conditions at fair value at
the service inception date based on probability of payout, and we remeasure
compensation expense at subsequent reporting dates until all of the award’s key
terms and conditions are known and the grant date is established. We amortize
awards with performance conditions using the graded expense method. We
measure compensation expense for awards with market conditions based on
the grant date fair value, as determined using a Monte Carlo simulation, and
we amortize the expense ratably over the requisite service period, regardless
of whether the market conditions are achieved and the awards ultimately vest.
Compensation expense for the trustee grants, which fully vest immediately, is
fully recognized upon issuance based upon the fair market value of the shares
on the date of grant.
Accounting for Uncertainty in Income Taxes
We can recognize a tax benefit only if it is “more likely than not” that a particular
tax position will be sustained upon examination or audit. To the extent that the
“more likely than not” standard has been satisfied, the benefit associated with a
tax position is measured as the largest amount that is greater than 50% likely of
being recognized upon settlement.
We are subject to federal income tax as well as income tax of the states of
Maryland and Virginia, and the District of Columbia. However, as a REIT, we
generally are not subject to income tax on our taxable income to the extent it is
distributed as dividends to our shareholders.
Tax returns filed for 2010 through 2014 tax years are subject to examination by
taxing authorities. We classify interest and penalties related to uncertain tax
positions, if any, in our financial statements as a component of general and
administrative expense.
90
WASHINGTON REIT NOTE 3. REAL ESTATE
Continuing Operations
As of December 31, 2014 and 2013, our real estate investment portfolio, at cost,
consists of properties as follows (in thousands):
Office
Retail
Multifamily
December 31,
2014
2013
$1,502,052
$1,296,967
463,716
505,185
415,899
389,361
$2,470,953
$2,102,227
We had properties under development or held for development as of
December 31, 2014. In the office segment, we had a redevelopment project to
renovate Silverline Center (formerly 7900 Westpark Drive). In the multifamily
segment, we had land held for future development at 1225 First Street and the
final phase of The Maxwell ground-up development project. During the fourth
quarter of 2014, we substantially completed major construction activities at The
Maxwell and placed into service assets totaling $31.3 million and will place the
remaining assets totaling approximately $17.9 million at December 31, 2014 into
service in 2015.
The cost of our real estate portfolio under development or held for future devel-
opment as of December 31, 2014 and 2013 is as follows (in thousands):
Our results of operations are dependent on the overall economic health of our
markets, tenants and the specific segments in which we own properties. These
segments include office, retail and multifamily. All segments are affected by
external economic factors, such as inflation, consumer confidence, unemploy-
ment rates, etc. as well as changing tenant and consumer requirements.
Office
Retail
Multifamily
As of December 31, 2014, no single property or tenant accounted for more than
10% of total assets or total real estate rental revenue.
December 31,
2014
$36,379
500
39,356
$76,235
2013
$12,175
495
48,645
$61,315
91
FORM 10-K Acquisitions
Our current strategy is focused on properties inside the Washington metro region’s Beltway, near major transportation nodes and in areas with strong employment
drivers and superior growth demographics. We seek to upgrade our portfolio with acquisitions as opportunities arise. Properties and land for development acquired
during the years ending December 31, 2014, 2013 and 2012 were as follows:
Acquisition Date
February 21, 2014
March 26, 2014
May 1, 2014
October 1, 2014
Total 2014
October 1, 2013
Total 2013
June 21, 2012
Total 2012
Property
Yale West (216 units)
The Army Navy Club Building
1775 Eye Street, NW
Spring Valley Retail Center
Type
Multifamily
Office
Office
Retail
The Paramount (135 units)
Multifamily
Fairgate at Ballston
Office
Rentable Square Feet
(unaudited)
Contract Purchase Price
(In thousands)
N/A
108,000
185,000
75,000
368,000
N/A
142,000
142,000
$ 73,000
79,000
104,500
40,500
$297,000
$ 48,200
$ 48,200
$ 52,250
$ 52,250
The results of operations from acquired operating properties are included in the
consolidated statements of income as of their acquisition dates.
We have recorded the total purchase price of the above acquisitions as follows
(in thousands):
The revenue and earnings of our acquisitions during their year of acquisition for
the three years ended December 31, 2014 are as follows (in thousands):
Year Ended December 31,
2014
Real estate rental revenue
$16,260
Net (loss) income
(3,168)
2013
$ 907
(105)
2012
$3,358
325
As discussed in note 2, we record the acquired physical assets (land, building
and tenant improvements), in-place leases (absorption, tenant origination costs,
leasing commissions, and net lease intangible assets/liabilities), and any other
liabilities at their fair values.
Land
Buildings
Tenant origination costs
Leasing commissions/absorption costs
Net lease intangible assets
Net lease intangible liabilities
2014
$ 104,403
172,671
9,377
16,474
7,331
(8,323)
Fair value of assumed mortgage
(107,125)
Furniture, fixtures & equipment
932
2013
$ 8,568
37,930
2012
$17,750
26,893
32
943
102
(117)
—
742
3,100
4,172
508
(173)
—
—
Total
$ 195,740
$48,200
$52,250
The weighted remaining average life for the 2014 acquisition components
above, other than land and building, are 66 months for tenant origination costs,
59 months for leasing commissions/absorption costs, 69 months for net lease
intangible assets and 105 months for net lease intangible liabilities.
92
WASHINGTON REIT The difference in the total contract price of $297.0 million for the 2014 acquisi-
tions and the acquisition cost per the consolidated statements of cash flows of
$194.5 million is primarily due to the assumption of two mortgage notes secured
by Yale West and The Army Navy Club Building for an aggregate $100.9 million
and the payment of a $3.6 million deposit for Yale West in 2013, partially offset
by a credit to the seller for building renovations at 1775 Eye Street, NW for
$1.9 million.
The difference in the contract purchase price of $52.3 million for the 2012 acqui-
sition and the cash paid for the acquisition per the consolidated statements of
cash flows of $52.1 million is primarily related to credits received at settlement
totaling $0.1 million.
The following unaudited pro-forma combined condensed statements of oper-
ations set forth the consolidated results of operations for the years ended
December 31, 2014 and 2013 as if the above described acquisitions in 2014
had occurred on January 1, 2013. The unaudited pro-forma information does
not purport to be indicative of the results that actually would have occurred if
the acquisitions had been in effect for the years ended December 31, 2014 and
2013. The unaudited data presented is in thousands, except per share data.
Real estate revenues
Income (loss) from continuing operations
Net income
Diluted earnings per share
Noncontrolling Interests in Subsidiaries
December 31,
2014
$295,876
$ 4,524
$ 111,055
$ 1.66
2013
$286,523
$ (4,128)
$ 33,411
$ 0.50
“Properties Sold or Held for Sale”), and in 2014 we distributed to the noncon-
trolling interest holder their share of the proceeds.
Variable Interest Entities
In June 2011, we executed a joint venture operating agreement with a real
estate development company to develop The Maxwell, a mid-rise multifamily
property at 650 North Glebe Road in Arlington, Virginia. We estimate the total
cost of the project to be $49.9 million, and we secured third-party debt financ-
ing totaling $33.0 million (see note 4). Washington REIT is the 90% owner of
the joint venture, and will have management and leasing responsibilities when
the project is completed and stabilized (defined as 90% of the residential units
leased). The real estate development company owns 10% of the joint venture
and is responsible for the development and construction of the property. Major
construction activities at The Maxwell ended during December 2014. However,
as of December 31, 2014, only two of the six residential floors were available for
occupancy. The remaining residential floors became available for occupancy
during the first quarter of 2015.
In November 2011, we executed a joint venture operating agreement with a
real estate development company to develop a high-rise multifamily property at
1225 First Street (formerly 1219 First Street) in Alexandria, Virginia. We esti-
mate the total cost of the project to be $95.3 million, with approximately 70% of
the project financed with debt. Washington REIT is the 95% owner of the joint
venture and will have management and leasing responsibilities when the project
is completed and stabilized. The real estate development company owns 5%
of the joint venture and is responsible for the development and construction of
the property. In the first quarter of 2013, we decided to delay commencement of
construction due to market conditions and concerns of oversupply. We continue
to reassess this project on a periodic basis going forward.
In August 2007, we acquired a 0.8 acre parcel of land located at 4661 Kenmore
Avenue, Alexandria, Virginia for future medical office development. The acquisi-
tion was funded by issuing operating partnership units in an operating partner-
ship, which is a consolidated subsidiary of Washington REIT. This resulted in
a noncontrolling ownership interest in this property based upon defined com-
pany operating partnership units at the date of purchase. In November 2013,
4661 Kenmore Avenue was sold as part of the Medical Office Portfolio (see
We have determined that The Maxwell and 1225 First Street joint ventures are
VIE’s primarily based on the fact that the equity investment at risk is not sufficient
to permit either entity to finance its activities without additional financial support.
We expect that 70% of the total development costs will be financed through debt.
We have also determined that Washington REIT is the primary beneficiary of
each VIE due to the fact that Washington REIT is providing 90% to 95% of the
equity contributions and will manage each property after stabilization.
93
FORM 10-K We include joint venture land acquisitions and related capitalized development
costs on our consolidated balance sheets in properties under development or
held for future development until placed in service or sold. As of December 31,
2014 and 2013 the land and capitalized development costs for 1225 First Street
were as follows (in thousands):
Properties under development or
held for future development
December 31,
2014
2013
$20,807
$20,788
Mortgage notes payable
Accounts payable and other liabilities
Tenant security deposits
December 31,
2014
$27,690
2,196
17
$29,903
2013
$7,297
1,785
—
$9,082
As of December 31, 2014 and 2013, The Maxwell’s liabilities were as follows
(in thousands):
Properties Sold or Held for Sale
We dispose of assets that no longer meet our long-term strategy or return objec-
tives 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 sharehold-
ers. Depreciation on these properties is discontinued at that time, but operating
revenues, other operating expenses and interest continue to be recognized until
the date of sale.
As of December 31, 2014 and 2013 the liabilities for 1225 First Street were as
follows (in thousands):
Accounts payable and other liabilities
December 31,
2014
$38
2013
$39
During the fourth quarter of 2014, we substantially completed major construction
activities at The Maxwell. As of December 31, 2014 and 2013 The Maxwell’s
assets were as follows (in thousands):
Land
Income producing property
Properties under development or
held for future development
December 31,
2014
$12,851
18,432
17,947
$49,230
2013
$ —
—
27,343
$27,343
94
WASHINGTON REIT We sold or classified as held for sale the following properties during the three years ended December 31, 2014:
Property
Type
Medical Office Portfolio Transactions III & IV(1)
Medical Office
5740 Columbia Road(2)
Total 2014
Atrium Building
Retail
Office
Medical Office Portfolio Transactions I & II
Medical Office/Office
Total 2013
1700 Research Boulevard
Plumtree Medical Center
Total 2012
Office
Medical Office
Rentable Square Feet
(unaudited)
Contract Sales Price
(in thousands)
Gain on Sale
(in thousands)
427,000
3,000
430,000
79,000
1,093,000
1,172,000
101,000
33,000
134,000
193,561
1,600
$195,161
$ 15,750
307,189
$322,939
$ 14,250
8,750
$ 23,000
$105,985
570
$106,555
$ 3,195
18,949
$ 22,144
$ 3,724
1,400
$ 5,124
(1) These properties were initially classified as held for sale during 2013.
(2) The property is classified as continuing operations in accordance with ASU No. 2014-08 (see note 2). All other listed properties are classified as discontinued operations in accordance with ASC 205-10, “Discontinued Operations.”
In September 2013, we entered into four separate purchase and sale agree-
ments to effectuate the sale of our entire medical office segment (including
land held for development at 4661 Kenmore Avenue) and two office buildings
(Woodholme Center and 6565 Arlington Boulevard) for an aggregate pur-
chase price of $500.8 million. The sale was structured as four transactions.
Transactions I & II closed in November 2013 and Transactions III & IV in January
2014. We do not have significant continuing involvement in the operations of the
disposed properties.
The impact of the sale on our medical office segment on revenues and net
income is summarized as follows (in thousands, except per share data):
Real estate revenues
Net income
Basic and diluted net
income per share
2014
$ 892
546
December 31,
2013
$41,012
14,044
2012
$44,674
8,128
0.01
0.21
0.12
As of December 31, 2014 and 2013, investment in real estate for properties sold
or held for sale were as follows (in thousands):
Medical office
Less accumulated depreciation
Investment in real estate sold or
held for sale, net
December 31,
2014
$—
—
$—
2013
$125,967
(46,066)
$ 79,901
As of December 31, 2014 and 2013, liabilities related to properties sold or held
for sale were as follows (in thousands):
Other liabilities
December 31,
2014
$—
2013
$1,533
95
FORM 10-K Income from properties classified as discontinued operations for the three years
ended December 31, 2014 was as follows (in thousands):
Revenues
Property expenses
Real estate impairment
Depreciation and amortization
Interest expense
Year Ending December 31,
2014
$ 892
(346)
—
—
—
2013
2012
$ 45,791
$ 54,344
(17,039)
—
(12,161)
(1,196)
(18,273)
(2,097)
(18,827)
(4,331)
$ 546
$ 15,395
$ 10,816
Income from properties classified as discontinued operations by property for the
three years ended December 31, 2014 was as follows (in thousands):
Property
Segment
1700 Research Boulevard
Office
Plumtree Medical Center
Medical Office
Atrium Building
Office
Medical Office Portfolio
Medical/Office
Year Ending December 31,
2014
$ —
—
—
546
$546
2013
2012
$ —
$ 225
—
185
15,210
197
1,063
9,331
$15,395
$10,816
Real Estate Impairment
During the fourth quarter of 2012, we determined that the development of a med-
ical office building at 4661 Kenmore Avenue in Alexandria, Virginia was no lon-
ger probable due to a change in corporate strategy. Due to this determination,
we recognized in discontinued operations an impairment charge of $2.1 million
during the fourth quarter of 2012 in order to reduce the carrying value of the
land at 4661 Kenmore Avenue to its estimated fair value of $3.8 million. 4661
Kenmore Avenue was sold during 2013.
We used a combination of internal models and a third-party valuation estimate
to determine the fair value of 4661 Kenmore Avenue. This fair valuation incor-
porated both market and income approaches, including recent comparable land
sales and return on cost of development metrics. The valuation is inherently
subjective because there are few observable market transactions for similar
land, and therefore we, through discussions with market participants, made
certain significant assumptions with respect to appropriate comparable trans-
actions to consider, cash flow estimates and discount rates. Our estimate of the
fair value of the land was further corroborated by an independent third-party
valuation specialist. This fair valuation falls into Level 3 in the fair value hierar-
chy due to its reliance on significant unobservable inputs.
96
WASHINGTON REIT NOTE 4. MORTGAGE NOTES PAYABLE
As of December 31, 2014 and 2013, we had outstanding mortgage notes payable, each collateralized by one or more buildings and related land from our portfolio, as
follows (in thousands):
Properties
Army Navy Club Building
Yale West(3)
The Maxwell(4,5)
John Marshall II
Olney Village Center
Kenmore Apartments
2445 M Street(5)
3801 Connecticut Avenue, Walker House and Bethesda Hill(6)
Assumption/
Issuance Date(1)
Effective
Interest Rate(2)
3/26/2014
2/21/2014
2/21/2013
9/15/2011
8/30/2011
2/2/2009
12/2/2008
5/29/2008
3.18%
3.75%
2.31%
5.79%
4.94%
5.37%
7.25%
5.71%
December 31,
2014
2013
$ 52,235
$ —
53,029
27,690
51,810
19,070
34,305
99,357
81,029
—
7,297
52,563
20,743
34,937
98,102
81,029
$418,525
$294,671
Payoff Date/
Maturity Date
5/1/2017
1/31/2022
2/21/2016
5/5/2016
10/1/2023
3/1/2019
1/6/2017
6/1/2016
(1) Each of these mortgages was assumed with the acquisition of the collateralized properties, except for the mortgage notes secured by 3801 Connecticut Avenue, Walker House, Bethesda Hill, Kenmore Apartments, and the
construction loan secured by the development project at The Maxwell, which were originally executed by Washington REIT. We record mortgages assumed in an acquisition at fair value, and balances presented include any
recorded premiums or discounts.
(2) Yield on the assumption/issuance date, including the effects of any premiums, discounts or fair value adjustments on the notes.
(3) The maturity date of the mortgage note is January 1, 2052, but can be prepaid, without penalty, beginning on January 31, 2022.
(4)
(5)
(6)
Interest rate on The Maxwell is variable, based on LIBOR plus 2.15%. The maturity date can be extended for up to two years, subject to fees and compliance with certain provisions in the loan agreement, until February 20, 2018.
Interest only is payable monthly until the maturity date upon which all unpaid principal and interest are payable in full.
Interest only is payable monthly until the maturity date, which can be extended for one year upon which the interest rate is reset on June 1, 2016. At maturity on June 1, 2017, all unpaid principal and interest are payable in full.
Except as noted above, principal and interest are payable monthly until the
maturity date, upon which all unpaid principal and interest are payable in full.
Scheduled principal payments subsequent to December 31, 2014 are as follows
(in thousands):
Total carrying amount of the above mortgaged properties was $607.8 million and
$433.7 million at December 31, 2014 and 2013, respectively.
2015
2016
2017
2018
2019
Thereafter
Net discounts/premiums
Total
$ 4,512
163,637
154,436
3,135
33,909
54,871
414,500
4,025
$418,525
97
FORM 10-K NOTE 5. UNSECURED LINES OF CREDIT PAYABLE
As of December 31, 2014, we maintained a $100.0 million unsecured line of
credit maturing in June 2015 (“Credit Facility No. 1”) and a $400.0 million unse-
cured line of credit maturing in July 2016 (“Credit Facility No. 2”). Credit Facility
No. 1 and No. 2 have accordion features that allow us to increase the facilities
to $200.0 million and $600.0 million, respectively, subject to additional lender
commitments. The amounts of these lines of credit unused and available at
December 31, 2014 were as follows (in thousands):
Committed capacity
Borrowings outstanding
Letters of credit issued
Unused and available
Credit Facility No. 1
Credit Facility No. 2
$100,000
(5,000)
—
$ 95,000
$400,000
(45,000)
—
$355,000
During January 2015, we provided a letter of credit under Credit Facility No. 2 for
$15.5 million to the lender for John Marshall II relating to tenant improvements.
We executed borrowings and repayments on the unsecured lines of credit during
2014 as follows (in thousands):
Balance at December 31, 2013
Borrowings
Repayments
Balance at December 31, 2014
Credit Facility No. 1
Credit Facility No. 2
$ —
10,000
(5,000)
$ 5,000
$ —
45,000
—
$45,000
Borrowings under Credit Facility No. 1 and No. 2 bear interest at LIBOR plus a
spread based on the credit rating on our publicly issued debt. The interest rate
spread is 120 basis points for each facility.
All outstanding advances for Credit Facility No. 1 and No. 2 are due and payable
upon maturity in June 2015 and July 2016, respectively. Credit Facility No. 1 and
No. 2 may be extended for one year at our option. Interest only payments are
due and payable generally on a monthly basis. In addition, we pay a facility fee
based on the credit rating of our publicly issued debt which as of December 31,
2014 equals 0.25% per annum of the committed capacity of each facility, without
regard to usage. Rates and fees may be adjusted up or down based on changes
in our senior unsecured credit ratings. For the three years ended December 31,
2014, we recognized interest expense (excluding facility fees) and facility fees as
follows (in thousands):
Interest expense (excluding facility fees)
Facility fees
Year Ending December 31,
2014
$ 196
1,267
2013
$ 867
1,267
2012
$1,253
1,062
Credit Facility No. 1 and No. 2 contain certain financial and non-financial cov-
enants, all of which we have met as of December 31, 2014 and 2013. Included
in these covenants is the requirement to maintain a minimum level of net worth,
as well as limits on our total liabilities, secured indebtedness and required debt
service payments.
98
WASHINGTON REIT Information related to revolving credit facilities for the three years ended December 31, 2014 as follows (in thousands, except percentage amounts):
Total revolving credit facilities at December 31
Borrowings outstanding at December 31
Weighted average daily borrowings during the year
Maximum daily borrowings during the year
Weighted average interest rate during the year
Weighted average interest rate on borrowings outstanding at December 31
2014
$500,000
50,000
12,849
55,000
1.53%
1.37%
Year Ended December 31,
2013
$500,000
—
61,548
135,000
1.41%
N/A
2012
$500,000
—
108,589
242,000
1.15%
N/A
NOTE 6. NOTES PAYABLE
Our unsecured notes outstanding as of December 31, 2014 were as follows
(in thousands):
The required principal payments excluding the effects of note discounts or pre-
mium for the remaining years subsequent to December 31, 2014 are as follows
(in thousands):
Coupon/
Stated Rate
Effective
Rate(1)
Principal
Amount
Maturity
Date(2)
2015
2016
2017
2018
2019
$ 50,000
5/1/2015
100,000
5/1/2015
250,000
10/1/2020
300,000
10/15/2022
Thereafter
50,000
2/25/2028
5.35%
5.35%
4.95%
3.95%
7.25%
5.359%
5.490%
5.053%
4.018%
7.360%
10 Year Unsecured Notes
10 Year Unsecured Notes
10 Year Unsecured Notes
10 Year Unsecured Notes
30 Year Unsecured Notes
Total principal
Net unamortized discount
Total
(1) Yield on issuance date, including the effects of discounts on the notes.
(2) No principal amounts are due prior to maturity.
750,000
(2,792)
$747,208
We extinguished the remaining $100.0 million of our 5.25% unsecured notes on
their maturity date of January 15, 2014.
$150,000
—
—
—
—
600,000
$750,000
Interest on these notes is payable semi-annually. These notes contain cer-
tain financial and non-financial covenants, all of which we have met as of
December 31, 2014. Included in these covenants is the requirement to maintain
a minimum level of unencumbered assets, as well as limits on our total indebt-
edness, secured indebtedness and required debt service payments.
The covenants under our line of credit agreements require us to insure our
properties against loss or damage in amounts customarily maintained by similar
businesses or as they may be required by applicable law. The covenants for the
notes require us to keep all of our insurable properties insured against loss or
damage at least equal to their then full insurable value. We have an insurance
policy that has no terrorism exclusion, except for non-certified nuclear, chemical
and biological acts of terrorism. Our financial condition and results of operations
are subject to the risks associated with acts of terrorism and the potential for
99
FORM 10-K uninsured losses as the result of any such acts. Effective November 26, 2002,
under this existing coverage, any losses caused by certified acts of terrorism
would be partially reimbursed by the United States under a formula established
by federal law. Under this formula, the United States pays 85% of covered
terrorism losses exceeding the statutorily established deductible paid by the
insurance provider, and insurers pay 10% until aggregate insured losses from
all insurers reach $100 billion in a calendar year. If the aggregate amount of
insured losses under this program exceeds $100 billion during the applicable
period for all insured and insurers combined, then each insurance provider
will not be liable for payment of any amount which exceeds the aggregate
amount of $100 billion. On December 26, 2007, the Terrorism Risk Insurance
Program Reauthorization Act of 2007 was signed into law and extended the
program through December 31, 2014. On January 12, 2015, The Terrorism
Risk Insurance Program Reauthorization Act of 2015 was signed into law and
extends the program through December 31, 2020.
NOTE 7. STOCK BASED COMPENSATION
Washington REIT maintains short-term and long-term incentive plans that allow
for stock-based awards to officers and non-officer employees. Stock based
awards are provided to officers and non-officer employees, as well as trustees,
under the Washington Real Estate Investment Trust 2007 Omnibus Long-Term
Incentive Plan which allows for awards in the form of restricted shares, restricted
share units, options, and other awards up to an aggregate of 2,000,000 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. There were no options outstanding as of December 31, 2014.
During 2014, the Board of Trustees adopted a new short-term incentive plan
(“STIP”) and new long-term incentive plan (“LTIP”) for executive officers.
Regarding the new STIP, the changes from the prior STIP primarily removed the
15% service-only component of the award and the 20% performance condi-
tion based on strategic acquisition and disposition goal criteria, maintaining an
award payable 50% in cash and 50% in stock. The new LTIP was modified to
be based entirely on total shareholder return during a defined three-year period.
The LTIP was also converted from a single three-year plan structure to a “rolling”
structure in which a new three-year plan is commenced each year. The vesting
at the end of the performance period was modified to be 75% at the end of the
performance period and 25% one year thereafter. In addition, during the tran-
sition period to the new LTIP, the Board of Trustees awarded similar transition
awards with defined performance periods of one and two years and modified
vesting to account for the transition.
Short-Term Incentive Plan
Under the STIP, executive officers earn awards, payable 50% in cash and 50%
in restricted shares, based on a percentage of salary and an achievement
rating subject to the discretion of the Compensation Committee of the Board of
Trustees in consideration of various performance conditions and other subjec-
tive factors during a one-year performance period. With respect to the 50% of
the STIP award payable in restricted shares, the restricted shares will vest over
a three-year period commencing on the January 1 following the end of the one-
year performance period.
The grant date for the 50% of the STIP award payable in restricted shares is the
date on which the Compensation Committee approves the STIP awards. We
recognize compensation expense on this 50% when the grant date occurs at the
end of the one-year period through the three-year vesting period.
Short-term incentive plans for other officers and non-officers are payable 100%
in cash.
Long-Term Incentive Plan
Under the LTIP, officers earn awards payable, 75% in unrestricted shares and
25% in restricted shares, based on a percentage of salary and the achievement
of certain market conditions. LTIP performance is evaluated based on 50% on
absolute total shareholder return (“TSR”) and 50% on relative TSR over a three-
year evaluation period with a new three-year period initiating under the existing
plan each year. The officers’ total award opportunity under the LTIP stated
as a percentage of base salary ranges from 80% to 150% at target level. The
unrestricted shares vest immediately at the end of the three-year performance
period, and the restricted shares vest over a one-year period commencing on
the January 1 following the end of the three-year performance period. In addi-
tion, during the transition period to the new LTIP, the Board of Trustees awarded
similar transition awards with defined performance periods of one and two years
and modified vesting to account for the transition.
100
WASHINGTON REIT We recognize compensation expense ratably (over three years for the 75%
unrestricted shares and over four years for the 25% restricted shares) based
on the grant date fair value, as determined using a Monte Carlo simulation,
and regardless of whether the market conditions are achieved and the awards
ultimately vest.
We use a binomial model which employs the Monte Carlo method as of the
grant date to determine the fair value of the officer LTIP awards. The market
condition performance measurement is based on total shareholder return on
both an absolute basis (50% weighting) and relative to a defined population
of 15 peer companies (50% weighting). The model evaluates the awards for
changing total shareholder return over the term of the vesting, on an absolute
basis and relative to the peer companies, and uses random simulations that are
based on past stock characteristics as well as dividend growth and other factors
for Washington REIT and each of the peer companies. The assumptions used
to value the officer LTIP awards were an expected volatility of 23.2%, a risk-
free interest rate of 0.8% and an expected life of 3 and 4 years. We based the
expected volatility upon the historical volatility of our daily closing share price.
The price at the grant date, April 23, 2014, was $24.08. We based the risk-free
interest rate used on U.S. treasury constant maturity bonds on the measure-
ment date with a maturity equal to the market condition performance period.
We based the expected term on the market condition performance period. The
calculated grant date fair value as a percentage of base salary for the officers
for the new three-year performance period that commenced in 2014 ranged
from approximately 35% to 67% for the 50% of the LTIP based on relative TSR
and from 20% to 38% for the 50% of the LTIP based on absolute TSR. For the
one-year transition awards, the calculated grant date fair value as a percentage
of base salary for the officers for the one-year performance period that com-
menced in 2014 ranged from approximately 11% to 20% for the 50% of the LTIP
based on relative TSR and from 10% to 20% for the 50% of the LTIP based on
absolute TSR. For the two-year transition awards, the calculated grant date fair
value as a percentage of base salary for the officers for the two-year perfor-
mance period that commenced in 2014 ranged from approximately 23% to 43%
for the 50% of the LTIP based on relative TSR and from 16% to 30% for the 50%
of the LTIP based on absolute TSR.
Non-officer employees earn restricted share unit awards under the LTIP based
upon various percentages of their salaries and annual performance calcu-
lations. The restricted share unit awards vest ratably over three years from
December 15 preceding the grant date based upon continued employment. We
initially measure compensation expense for awards with performance conditions
at fair value at the service inception date based on probability of payout, and we
remeasure compensation expense at subsequent reporting dates until all of the
award’s key terms and conditions are known and the grant date is established.
We recognize compensation expense for these awards according to a graded
vesting schedule over the four-year requisite service period.
Trustee Awards
We award share based compensation to our trustees on an annual basis in the
form of restricted shares which vest immediately and are restricted from sale for
the period of the trustees’ service. The value of share-based compensation for
each trustee was $55,000 for each of the years ended December 31, 2014, 2013
and 2012.
Total Compensation Expense
Total compensation expense recognized in the consolidated financial state-
ments for the three years ended December 31, 2014 for all share based awards,
was as follows (in thousands):
Stock-based compensation expense
$4,995
2014
Year Ended December 31,
2013
$6,246
2012
$5,856
Washington REIT’s prior chief executive officer (“Prior CEO”) retired as of
December 31, 2013. Under the terms of his separation agreement, all of the
Prior CEO’s unvested restricted shares and restricted share units under the
prior STIP, prior LTIP and deferred compensation plans vested on December 31,
2013. The impact of this modification of the Prior CEO’s awards was $1.0 million
for the year ended December 31, 2013.
101
FORM 10-K Restricted Share Awards
Restricted and Unrestricted Shares with Market Conditions
The activity for the three years ended December 31, 2014 related to our
restricted share awards, excluding those subject to market conditions, was
as follows:
Stock based awards with market conditions under the LTIP were granted in
February 2014 with fair market values, as determined using a Monte Carlo simu-
lation, as follows (in thousands):
Year Ended December 31, 2014
Wtd Avg Grant
Fair Value
$28.39
Relative TSR
Absolute TSR
Grant Date Fair Value
Restricted
Unrestricted
$458
327
$1,376
921
Unvested at December 31, 2011
Granted
Vested during year
Forfeited
Unvested at December 31, 2012
Granted
Vested during year
Forfeited
Unvested at December 31, 2013
Granted
Vested during year
Forfeited
Unvested at December 31, 2014
Shares
331,003
36,884
(211,485)
(6,599)
149,803
141,609
(158,657)
(2,940)
129,815
210,817
(236,498)
(10,467)
93,667
26.40
28.39
27.61
27.37
26.30
26.66
27.80
27.06
23.93
25.06
25.80
25.22
The total fair value of share grants vested for the years ended December 31,
2014, 2013 and 2012 was $6.1 million, $3.8 million and $5.6 million, respectively.
The unamortized value of these awards with market conditions as of
December 31, 2014 was as follows (in thousands):
Relative TSR
Absolute TSR
Restricted
Unrestricted
$354
251
$841
549
NOTE 8. OTHER BENEFIT PLANS
We have a Retirement Savings Plan (the “401(k) Plan”), which permits all
eligible employees to defer a portion of their compensation in accordance with
the Internal Revenue Code. Under the 401(k) Plan, we may make discretion-
ary contributions on behalf of eligible employees. For the three years ended
December 31, 2014, we made contributions to the 401(k) plan as follows
(in thousands):
As of December 31, 2014, the total compensation cost related to non-vested
share awards not yet recognized was $1.2 million, which we expect to recognize
over a weighted average period of 17 months.
401(k) plan contributions
Year Ended December 31,
2014
$423
2013
$428
2012
$467
102
WASHINGTON REIT We have adopted non-qualified deferred compensation plans for the officers and
members of the Board of Trustees. The plans allow for a deferral of a percentage of
annual cash compensation and trustee fees. The plans are unfunded and payments
are to be made out of the general assets of Washington REIT. The deferred com-
pensation liability at December 31, 2014 and 2013 was as follows (in thousands):
Deferred compensation liability
December 31,
2014
$1,556
2013
$1,437
In November 2005, the Board of Trustees approved the establishment of a
Supplemental Executive Retirement Plan (“SERP”) for the benefit of officers,
other than the former CEO. This is a defined contribution plan under which, upon
a participant’s termination of employment from Washington REIT for any reason
other than death, discharge for cause or total and permanent disability, the
participant will be entitled to receive a benefit equal to the participant’s accrued
benefit times the participant’s vested interest. We account for this plan in accor-
dance with ASC 710-10 and ASC 320-10, whereby the investments are reported
at fair value, and unrealized holding gains and losses are included in earnings.
At December 31, 2014 and 2013, the accrued benefit liability was $2.8 million
and $3.3 million, respectively. For the three years ended December 31, 2014, we
recognized current service cost as follows (in thousands):
Officer SERP current service cost
Year Ended December 31,
2014
$306
2013
$325
2012
$342
NOTE 9. FAIR VALUE DISCLOSURES
Assets and Liabilities Measured at Fair Value
For assets and liabilities measured at fair value on a recurring basis, quantita-
tive 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 December 31, 2014 and 2013 that are recorded at fair value on a recurring basis are the assets held in the SERP, which
primarily consists of investments in mutual funds. We base the valuations related to these items on assumptions derived from significant other observable inputs and
accordingly these valuations fall into Level 2 in the fair value hierarchy. The fair values of these assets at December 31, 2014 and 2013 were as follows (in thousands):
December 31, 2014
December 31, 2013
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Fair Value
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Assets:
SERP
$2,778
$—
$2,778
$—
$3,290
$—
$3,290
$—
Financial Assets and Liabilities Not Measured at Fair Value
The following disclosures of estimated fair value were determined by manage-
ment using available market information and established valuation methodolo-
gies, including discounted cash flow. 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
December 31, 2014 may differ significantly from the amounts presented.
103
FORM 10-K Below is a summary of significant methodologies used in estimating fair values
and a schedule of fair values at December 31, 2014.
As of December 31, 2014 and 2013, the carrying values and estimated fair val-
ues of our financial instruments were as follows (in thousands):
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents and restricted cash include cash and commercial
paper with original maturities of less than 90 days, which are valued at the
carrying value, which approximates fair value due to the short maturity of these
instruments (Level 1 inputs).
Notes Receivable
We acquired a note receivable (“2445 M Street note”) in 2008 with the pur-
chase of 2445 M Street. We estimate the fair value of the 2445 M Street note
based on a discounted cash flow methodology using market discount rates
(Level 3 inputs).
Debt
Mortgage notes payable consist of instruments in which certain of our real
estate assets are used for collateral. We estimate the fair value of the mortgage
notes payable by discounting the contractual cash flows at a rate equal to the
relevant treasury rates (with respect to the timing of each cash flow) plus credit
spreads estimated through independent comparisons to real estate assets or
loans with similar characteristics. Lines of credit payable consist of bank facil-
ities which we use for various purposes including working capital, acquisition
funding or capital improvements. The lines of credit advances are priced at a
specified rate plus a spread. We estimate the market value based on a compari-
son of the spreads of the advances to market given the adjustable base rate. We
estimate the fair value of the notes payable by discounting the contractual cash
flows at a rate equal to the relevant treasury rates (with respect to the timing
of each cash flow) plus credit spreads derived using the relevant securities’
market prices. We classify these fair value measurements as Level 3 as we use
significant unobservable inputs and management judgment due to the absence
of quoted market prices.
December 31,
2014
2013
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Cash and cash equivalents
$ 15,827
$ 15,827
$130,343
$130,343
Restricted cash
2445 M Street note receivable
10,299
4,404
10,299
5,113
9,189
6,070
9,189
6,803
Mortgage notes payable
418,525
433,762
294,671
313,476
Lines of credit payable
50,000
50,000
—
—
Notes payable
747,208
782,042
846,703
856,171
NOTE 10. 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 attributable to the controlling interest 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 secu-
rities at the end of the period and adjust the basic earnings per share calcula-
tion for the impact of those securities that are dilutive. Our dilutive earnings per
share calculation includes the dilutive impact of employee stock options (prior to
their expiration at December 31, 2014) based on the treasury stock 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 dilutive
earnings per share calculation also considers operating partnership units for
the years ended December 31, 2013 and 2012 under the if-converted method.
We had no operating partnership units as of December 31, 2014. We had a loss
from continuing operations for the year ended December 31, 2013 and therefore
diluted earnings per share is calculated in the same manner as basic earnings
per share for that year.
104
WASHINGTON REIT The computation of basic and diluted earnings per share for the three years ended December 31, 2014 was as follows (in thousands; except per share data):
Numerator:
Income (loss) from continuing operations
Allocation of undistributed earnings to unvested restricted share awards and units to continuing operations
Adjusted income (loss) from continuing operations attributable to the controlling interests
Income from discontinued operations, including gain on sale of real estate, net of taxes
Net income attributable to noncontrolling interests
Allocation of undistributed earnings to unvested restricted share awards and units to discontinued operations
Adjusted income from discontinued operations attributable to the controlling interests
Adjusted net income attributable to the controlling interests
Denominator:
Weighted average shares outstanding—basic
Effect of dilutive securities:
Employee stock options and restricted share awards
Weighted average shares outstanding—diluted
Earnings per common share, basic:
Continuing operations
Discontinued operations
Earnings per common share, diluted:
Continuing operations
Discontinued operations
Year Ended December 31,
2014
2013
2012
$5,070
5
5,075
106,531
38
(322)
106,247
$111,322
$ (193)
$ 7,768
—
(193)
37,539
—
(415)
37,124
$36,931
(191)
7,577
15,940
—
(391)
15,549
$23,126
66,795
66,580
66,239
42
66,837
$0.08
1.59
$1.67
$0.08
1.59
$1.67
—
66,580
$ —
0.55
$ 0.55
$ —
0.55
$ 0.55
137
66,376
$ 0.11
0.24
$ 0.35
$ 0.11
0.24
$ 0.35
105
FORM 10-K NOTE 11. RENTALS UNDER OPERATING LEASES
NOTE 12. COMMITMENTS AND CONTINGENCIES
As of December 31, 2014, non-cancelable commercial operating leases that
provide for minimum rental income from continuing operations were as follows
(in thousands):
2015
2016
2017
2018
2019
Thereafter
$ 192,105
176,751
156,837
134,039
112,575
316,645
$1,088,952
Apartment leases are not included as the terms are generally for one year. Most
of these commercial leases increase in future years based on agreed-upon per-
centages or in some instances, changes in the Consumer Price Index.
Real estate tax, operating expense and common area maintenance reim-
bursement income from continuing operations for the three years ended
December 31, 2014 was as follows (in thousands):
Reimbursement income
$31,610
2014
Year Ended December 31,
2013
$26,822
2012
$25,528
Development Commitments
At December 31, 2014, we had no committed contracts outstanding with third
parties in connection with our development and redevelopment projects at 1225
First Street, The Maxwell and Silverline Center.
Litigation
We are involved from time to time in various legal proceedings, lawsuits, exam-
inations by various tax authorities and claims that have arisen in the ordinary
course of business. Management believes that the resolution of any such cur-
rent matters will not have a material adverse effect on our financial condition or
results of operations.
Other
At December 31, 2014 and 2013, we had no letters of credit issued under our
line of credit facility.
106
WASHINGTON REIT NOTE 13. SEGMENT INFORMATION
We have three reportable segments: office, retail, and multifamily. Retail shop-
ping centers are typically grocery store anchored neighborhood centers that
include other small shop tenants or regional power centers with several junior
box tenants. Multifamily properties provide rental housing for individuals and
families throughout the Washington metro region.
Real estate rental revenue as a percentage of the total for each of the report-
able operating segments in continuing operations for the three years ended
December 31, 2014 was as follows:
The percentage of total income producing real estate assets, at cost, for each of
the reportable operating segments in continuing operations as of December 31,
2014 and 2013 was as follows:
Office
Retail
Multifamily
December 31,
2014
61%
19%
20%
2013
62%
20%
18%
Year Ended December 31,
The accounting policies of each of the segments are the same as those
described in note 2.
Office
Retail
Multifamily
2014
57%
21%
22%
2013
58%
21%
21%
2012
58%
21%
21%
We evaluate performance based upon net operating income from the combined
properties in each segment. Our reportable operating segments are consolida-
tions of similar properties. GAAP requires that segment disclosures present the
measure(s) used by the chief operating decision maker for purposes of assess-
ing segments’ performance. Net operating income is a key measurement of our
segment profit and loss. Net operating income is defined as segment real estate
rental revenue less segment real estate expenses.
107
FORM 10-K The following tables present revenues, net operating income, capital expenditures and total assets for the three years ended December 31, 2014 from these seg-
ments, and reconciles net operating income of reportable segments to net income attributable to the controlling interests as reported (in thousands):
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
General and administrative
Acquisition costs
Interest expense
Other income
Gain on sale of real estate
Discontinued operations:
Income from properties sold or held for sale
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
Year Ended December 31, 2014
Office
Retail
$ 166,116
$ 60,263
63,903
14,022
$ 102,213
$ 46,241
Multifamily
$ 62,258
25,770
$ 36,488
Corporate
and Other
Consolidated
$ —
$ 288,637
—
103,695
$ —
$ 184,942
(96,011)
(19,761)
(5,710)
(59,785)
825
570
546
105,985
111,601
38
$ 111,639
$ 59,529
$2,113,707
$ 43,128
$1,284,523
$ 5,496
$385,174
$ 9,186
$408,772
$ 1,719
$35,238
108
WASHINGTON REIT Office
$ 152,339
57,293
Medical
Office
$ —
—
$ 95,046
$ —
Year Ended December 31, 2013
Retail
$ 56,189
13,768
$ 42,421
Multifamily
$ 54,496
22,232
$ 32,264
Corporate
and Other
Consolidated
$ —
$ 263,024
—
93,293
$ —
$ 169,731
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
General and administrative
Acquisition costs
Interest expense
Other income
Loss on extinguishment of debt
Discontinued operations:
Income from properties sold or held for sale
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
$ 37,777
$1,073,302
$ 3,695
$84,001
$ 4,204
$344,207
$ 10,153
$309,117
$ 162
$164,866
(85,740)
(17,535)
(1,265)
(63,573)
926
(2,737)
15,395
22,144
37,346
—
$ 37,346
$ 55,991
$1,975,493
109
FORM 10-K Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
General and administrative
Acquisition costs
Interest expense
Other income
Discontinued operations:
Income from properties sold or held for sale
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
Office
Medical
Office
$ 147,401
$ —
53,376
—
$ 94,025
$ —
Year Ended December 31, 2012
Retail
$ 54,506
12,702
$ 41,804
Multifamily
$ 52,887
20,467
$ 32,420
Corporate
and Other
Consolidated
$ —
$ 254,794
—
86,545
$ —
$ 168,249
(85,107)
(15,488)
(234)
(60,627)
975
10,816
5,124
23,708
—
$ 23,708
$ 51,735
$2,124,376
Capital expenditures
Total assets
$ 35,330
$1,140,046
$ 7,004
$327,573
$ 2,977
$355,585
$ 5,869
$249,503
$ 555
$51,669
110
WASHINGTON REIT NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited financial data by quarter for each of the three months in the years ended December 31, 2014 and 2013 were as follows (in thousands, except for per
share data):
2014
Real estate rental revenue
Income (loss) from continuing operations
Income from operations of properties sold or held for sale—medical office segment
Net income
Net income attributable to the controlling interests
Income (loss) from continuing operations per share
Basic
Diluted
Net income per share
Basic
Diluted
2013
Real estate rental revenue
Income (loss) from continuing operations
Income from operations of properties sold or held for sale—medical office segment
Net income
Net income attributable to the controlling interests
Income from continuing operations per share
Basic
Diluted
Net income per share
Basic
Diluted
First
Second
Third
Fourth
Quarter(1,2)
$ 68,611
$ (2,265)
$ 546
$104,554
$104,554
$ (0.04)
$ (0.04)
$ 1.56
$ 1.56
$ 64,560
$ 857
$ 2,821
$ 7,335
$ 7,335
$ 0.01
$ 0.01
$ 0.11
$ 0.11
$72,254
$ 1,368
$ —
$ 1,080
$ 1,087
$ 0.02
$ 0.02
$ 0.02
$ 0.02
$65,915
$ 1,538
$ 3,439
$ 5,263
$ 5,263
$ 0.02
$ 0.02
$ 0.08
$ 0.08
$73,413
$ 3,658
$ —
$ 3,658
$ 3,668
$ 0.05
$ 0.05
$ 0.05
$ 0.05
$65,828
$ 1,709
$ 3,820
$ 5,840
$ 5,840
$ 0.03
$ 0.03
$ 0.09
$ 0.09
$74,359
$ 2,309
$ —
$ 2,309
$ 2,330
$ 0.03
$ 0.03
$ 0.03
$ 0.03
$66,721
$ (4,297)
$ 3,964
$18,908
$18,908
$ (0.06)
$ (0.06)
$ 0.28
$ 0.28
(1) With regard to per share calculations, the sum of the quarterly results may not equal full year results due to rounding.
(2) The first quarter of 2014, fourth quarter of 2013 and first quarter of 2013 include gains on sale of real estate in discontinued operations of $106.0 million, $18.9 million and $3.2 million, respectively.
111
FORM 10-K NOTE 15. SHAREHOLDERS’ EQUITY
We are party to a sales agency financing agreement with BNY Mellon Capital
Markets, LLC relating to the issuance and sale of up to $250.0 million of our
common shares from time to time over a period of no more than 36 months from
June 2012. Sales of our common shares are made at market prices prevailing
at the time of sale. Net proceeds for the sale of common shares under this
program are used for general corporate purposes. During 2014, we issued
1,125,000 common shares at a weighted average price of $27.86 for net pro-
ceeds of $30.7 million. We did not issue shares under this sales agency financ-
ing agreement during 2013 or 2012.
NOTE 16. DEFERRED COSTS
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. Net proceeds under this
program are used for general corporate purposes. We issued no shares under
this program during 2014 and 2013. During 2012, we issued 55,000 common
shares at a weighted average price of $29.67 for net proceeds of $1.3 million
under this program.
As of December 31, 2014 and 2013 deferred costs were included in prepaid expenses and other assets as follows (in thousands):
Deferred financing costs
Deferred leasing costs
Deferred leasing incentives
Gross
Carrying Value
$18,836
50,943
14,194
2014
Accumulated
Amortization
$11,801
18,351
3,605
December 31,
Net
$ 7,035
32,592
10,589
Gross
Carrying Value
$17,842
39,642
7,143
2013
Accumulated
Amortization
$ 8,950
14,788
2,417
Net
$ 8,892
24,854
4,726
Amortization and write-offs of deferred financing, leasing and leasing incentives
costs from continuing operations for the three years ended December 31, 2014
were as follows (in thousands):
Deferred financing costs amortization
Deferred leasing costs amortization
Deferred leasing incentives amortization
Year Ended December 31,
2014
$2,851
4,699
1,704
2013
$2,550
4,279
980
2012
$2,411
3,635
675
NOTE 17. SUBSEQUENT EVENTS
In February 2015, we entered into a purchase and sale agreement for the sale
of Country Club Towers, a 227-unit multifamily property located in Arlington, VA,
for a contract purchase price of $37.8 million.
112
WASHINGTON REIT SCHEDULE II
Valuation and Qualifying Accounts for the Years Ended December 31, 2014, 2013 and 2012
(in thousands)
Allowance for doubtful accounts
2014
2013
2012
Valuation allowance for deferred tax assets
2014
2013
2012
Balance at
Beginning of Year
Additions Charged
to Expenses
Net Deductions
(Recoveries)
Balance at
End of Year
$ 6,783
$10,443
$ 8,049
$ 5,741
$ 5,773
$ 5,651
$1,402
$3,531
$3,811
$ —
$ —
$ 122
$(4,793)
$(7,191)
$(1,417)
$ (27)
$ (32)
$ —
$ 3,392
$ 6,783
$10,443
$ 5,714
$ 5,741
$ 5,773
113
FORM 10-K SCHEDULE III
Properties
Location
Land
Multifamily Properties
Initial Cost(b)
Buildings and
Improvements
Net
Improvements
(Retirement)
since Acquisition
Gross Amounts at Which Carried at December 31, 2014
Land
Buildings and
Improvements
Total(c)
Accumulated
Depreciation at
December 31, 2014
Year of
Construction
Date of
Acquisition
Net Rentable
Square Feet(e)
Units
Depre-
ciation
Life(d)
3801 Connecticut Avenue(a)
DC
$ 420,000 $ 2,678,000 $ 10,698,000 $ 420,000 $ 13,376,000
$ 13,796,000 $ 9,339,000
336,000
299,000
287,000
322,000
1,996,000
11,148,000
336,000
13,144,000
13,480,000
8,296,000
2,562,000
15,144,000
299,000
17,706,000
18,005,000
11,055,000
1,654,000
10,227,000
287,000
11,881,000
12,168,000
8,361,000
3,337,000
15,739,000
322,000
19,076,000
19,398,000
14,111,000
4,356,000
17,102,000
17,300,000
4,356,000
34,402,000
38,758,000
20,788,000
2,851,000
7,946,000
6,906,000
2,851,000
14,852,000
17,703,000
9,651,000
3,900,000
13,412,000
12,394,000
3,900,000
25,806,000
29,706,000
15,904,000
2,861,000
917,000
79,610,000
4,774,000
78,614,000
83,388,000
26,172,000
269,000
—
30,631,000
699,000
30,201,000
30,900,000
11,428,000
28,222,000
33,955,000
10,296,000
28,222,000
44,251,000
72,473,000
8,765,000
1951
1964
1965
1959
1963
1982
1971
1986
2007
2008
1948
Jan 1963
179,000
307 30 yrs
May 1965
170,000
191 40 yrs
Jul 1969
159,000
227 35 yrs
Jan 1969
173,000
200 35 yrs
Jan 1970
258,000
279 33 yrs
Aug 1996
274,000
256 30 yrs
Mar 1996
157,000
212 30 yrs
Nov 1997
225,000
195 30 yrs
Feb 2001
214,000
224 28 yrs
Jun 2003
60,000
74 26 yrs
Sep 2008
268,000
374 30 yrs
12,787,000
14,046,000
—
—
36,443,000
12,851,000
36,379,000
49,230,000
— 2014
Jun 2011
143,000
163 30 yrs
6,761,000
—
20,807,000
20,807,000
—
N/A
Nov 2011
—
— N/A
8,568,000
38,716,000
670,000
8,568,000
39,386,000
47,954,000
2,118,000
14,684,000
62,069,000
21,000
14,684,000
62,090,000
76,774,000
1,954,000
$ 94,208,000 $ 186,344,000 $263,988,000 $ 82,569,000 $ 461,971,000
$ 544,540,000 $147,942,000
$ 892,000 $ 3,481,000 $ 16,943,000 $ 892,000 $ 20,424,000
$ 21,316,000 $ 14,802,000
840,000
10,869,000
27,904,000
840,000
38,773,000
39,613,000
27,848,000
4,102,000
3,931,000
5,744,000
4,102,000
9,675,000
13,777,000
5,164,000
4,621,000
11,926,000
16,149,000
4,621,000
28,075,000
32,696,000
17,929,000
7,803,000
11,366,000
15,464,000
7,802,000
26,831,000
34,633,000
12,520,000
6,661,000
16,742,000
23,146,000
6,661,000
39,888,000
46,549,000
18,299,000
12,049,000
71,825,000
68,237,000
12,049,000
140,062,000
152,111,000
64,474,000
2,296,000
12,188,000
6,945,000
2,296,000
19,133,000
21,429,000
9,879,000
1,564,000
6,243,000
9,049,000
1,564,000
15,292,000
16,856,000
7,976,000
—
17,096,000
7,946,000
—
25,042,000
25,042,000
11,976,000
5,480,000
39,107,000
17,721,000
5,480,000
56,828,000
62,308,000
28,510,000
31,500,000
54,327,000
5,217,000
31,500,000
59,544,000
91,044,000
25,560,000
1984
2011
1960
1975
1966
1971
1976
1973
1972
1985
1970
1979
1974
1979
Oct 2013
141,000
135 30 yrs
Feb 2014
173,000
216 30 yrs
2,594,000 3,053
May 1977
101,000
Aug 1979
221,000
Jul 1992
75,000
Jan 1995
201,000
Nov 1995
103,000
Oct 1997
166,000
Nov 1997
526,000
May 1999
113,000
May 2000
99,000
Oct 2000
116,000
Apr 2001
267,000
Aug 2003
263,000
28 yrs
41 yrs
50 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
n/a
15,001,000
494,000
(3,400,000)
484,000
11,611,000
12,095,000
403,000
n/a
Dec 2005
—
Roosevelt Towers
Country Club Towers
Park Adams
Munson Hill Towers
The Ashby at McLean
Walker House Apartments(a)
Bethesda Hill Apartments(a)
Bennett Park
The Clayborne
The Kenmore(a)
The Maxwell(g)
1225 First Street(g)
The Paramount
Yale West(a)
Office Buildings
1901 Pennsylvania Avenue
51 Monroe Street
515 King Street
6110 Executive Boulevard
1220 19th Street
1600 Wilson Boulevard
Silverline Center(f)
600 Jefferson Plaza
Wayne Plaza
Courthouse Square
One Central Plaza
1776 G Street
Dulles Station, Phase II(f)
VA
VA
VA
VA
VA
MD
MD
VA
VA
DC
VA
VA
VA
DC
DC
MD
VA
MD
DC
VA
VA
MD
MD
VA
MD
DC
VA
114
WASHINGTON REIT Initial Cost(b)
Location
Land
Buildings and
Improvements
Net
Improvements
(Retirement)
since Acquisition
Gross Amounts at Which Carried at December 31, 2014
Land
Buildings and
Improvements
Total(c)
Accumulated
Depreciation at
December 31, 2014
Year of
Construction
Date of
Acquisition
Net Rentable
Square Feet(e)
Units
Properties
West Gude
Monument II
2000 M Street
2445 M Street(a)
925 Corporate Drive
1000 Corporate Drive
1140 Connecticut Avenue
1227 25th Street
Braddock Metro Center
John Marshall II(a)
Fairgate at Ballston
Army Navy Club Bldg(a)
1775 Eye Street, NW
Retail Centers
Takoma Park
Westminster
Concord Centre
Wheaton Park
Bradlee Shopping Center
Chevy Chase Metro Plaza
Montgomery Village Center
Shoppes of Foxchase
Frederick County Square
800 S. Washington Street
Centre at Hagerstown
Frederick Crossing
Randolph Shopping Center
Montrose Shopping Center
Gateway Overlook
Olney Village Center(a)
Spring Valley Retail Center
MD
11,580,000
43,240,000
11,699,000
11,580,000
54,939,000
66,519,000
17,686,000
VA
DC
DC
VA
VA
DC
DC
VA
VA
VA
DC
DC
10,244,000
65,205,000
7,075,000
10,244,000
72,280,000
82,524,000
19,424,000
—
61,101,000
21,215,000
—
82,316,000
82,316,000
20,670,000
46,887,000
106,743,000
5,127,000
46,887,000
111,870,000
158,757,000
26,905,000
4,518,000
24,801,000
800,000
4,518,000
25,601,000
30,119,000
6,404,000
4,897,000
25,376,000
243,000
4,898,000
25,618,000
30,516,000
6,603,000
25,226,000
50,495,000
11,280,000
25,226,000
61,775,000
87,001,000
10,246,000
17,505,000
21,319,000
2,254,000
17,505,000
23,573,000
41,078,000
4,412,000
18,817,000
71,250,000
10,450,000
18,818,000
81,699,000
100,517,000
12,291,000
13,490,000
53,024,000
176,000
13,490,000
53,200,000
66,690,000
7,297,000
17,750,000
29,885,000
3,164,000
17,750,000
33,049,000
50,799,000
4,166,000
30,796,000
39,315,000
704,000
30,796,000
40,019,000
70,815,000
1,579,000
48,086,000
51,074,000
2,151,000
48,086,000
53,225,000
101,311,000
1,659,000
$342,605,000 $ 902,423,000 $293,403,000 $328,089,000 $1,210,342,000
$1,538,431,000 $384,682,000
MD $ 415,000 $ 1,084,000 $ 268,000 $ 415,000 $ 1,352,000
$ 1,767,000 $ 1,188,000
MD
VA
MD
VA
DC
MD
VA
MD
VA
MD
MD
MD
MD
MD
MD
DC
519,000
413,000
796,000
1,775,000
9,710,000
519,000
11,485,000
12,004,000
6,920,000
850,000
5,038,000
857,000
4,576,000
413,000
796,000
5,888,000
5,433,000
6,301,000
3,047,000
6,229,000
3,567,000
4,152,000
5,383,000
10,332,000
4,152,000
15,715,000
19,867,000
10,141,000
1,549,000
4,304,000
5,381,000
1,549,000
9,685,000
11,234,000
6,341,000
11,625,000
9,105,000
3,338,000
11,625,000
12,443,000
24,068,000
5,831,000
5,838,000
2,979,000
14,039,000
5,838,000
17,018,000
22,856,000
6,008,000
6,561,000
6,830,000
4,421,000
6,561,000
11,251,000
17,812,000
6,864,000
2,904,000
5,489,000
6,024,000
2,904,000
11,513,000
14,417,000
4,471,000
13,029,000
25,415,000
2,383,000
13,029,000
27,798,000
40,827,000
11,851,000
12,759,000
35,477,000
2,235,000
12,759,000
37,712,000
50,471,000
13,076,000
4,928,000
13,025,000
752,000
4,928,000
13,777,000
18,705,000
4,315,000
11,612,000
22,410,000
2,500,000
11,612,000
24,910,000
36,522,000
7,714,000
28,816,000
52,249,000
235,000
29,110,000
52,190,000
81,300,000
10,989,000
15,842,000
39,133,000
1,729,000
15,842,000
40,862,000
56,704,000
5,214,000
10,836,000
32,238,000
59,000
10,836,000
32,297,000
43,133,000
273,000
$132,594,000 $ 258,603,000 $ 73,020,000 $132,888,000 $ 331,329,000
$ 464,217,000 $107,810,000
1984
2000
1971
1986
2007
2009
1966
1988
1985
1996
1988
1912
1964
1962
1969
1960
1967
1955
1975
1969
1960
1973
1951
2000
1999
1972
1970
2007
1979
1941
Aug 2006
276,000
Mar 2007
208,000
Dec 2007
230,000
Dec 2008
290,000
Jun 2010
133,000
Jun 2010
136,000
Jan 2011
183,000
Mar 2011
135,000
Sep 2011
353,000
Sep 2011
223,000
Jun 2012
142,000
Mar 2014
108,000
May 2014
185,000
4,853,000
Jul 1963
51,000
Sep 1972
150,000
Dec 1973
Sep 1977
76,000
74,000
Dec 1984
171,000
Sep 1985
49,000
Dec 1992
197,000
Jun 1994
134,000
Aug 1995
227,000
Jun 1998
47,000
Jun 2002
332,000
Mar 2005
295,000
May 2006
82,000
May 2006
145,000
Dec 2010
220,000
Aug 2011
199,000
Oct 2014
75,000
Total
$569,407,000 $1,347,370,000 $630,411,000 $543,546,000 $2,003,642,000
$2,547,188,000 $640,434,000
Depre-
ciation
Life(d)
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
50 yrs
37 yrs
33 yrs
50 yrs
40 yrs
50 yrs
50 yrs
50 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
30 yrs
2,524,000
9,971,000 3,053
115
FORM 10-K a) At December 31, 2014, our properties were encumbered by non-recourse mortgage amounts as follows: $35.4 million on 3801 Connecticut Avenue, $16.5 million on Walker House, $29.1 million on Bethesda Hill, $34.3 million on
The Kenmore, $99.4 million on 2445 M Street, $51.8 million on John Marshall II, and $19.1 million on Olney Village Center, $53.0 million on Yale West, and $52.2 million on The Amy Navy Club Building.
b) The purchase cost of real estate investments has been divided between land and buildings and improvements on the basis of management’s determination of the fair values.
c) At December 31, 2014, total land, buildings and improvements are carried at $2,113.2 million for federal income tax purposes.
d) The useful life shown is for the main structure. Buildings and improvements are depreciated over various useful lives ranging from 3 to 50 years.
e) Residential properties are presented in gross square feet.
f) As of December 31, 2014, Washington REIT had under development an office project with 360,000 square feet of office space and a parking garage to be developed in Herndon, VA (Dulles Station, Phase II). The value not yet
placed in service of Dulles Station, Phase II at December 31, 2014 was $8.5 million. $3.6 million of Dulles Station, Phase II was placed into service upon the completion of a portion of the parking garage structure. Additionally,
Washington REIT had investments in various development or redevelopment projects, including Silverline Center. The value of this redevelopment not yet placed in service is $26.1 million at December 31, 2014.
g) As of December 31, 2014, Washington REIT had under development via joint venture arrangements, a mid-rise multifamily property in Arlington, Virginia (The Maxwell) and a high-rise multifamily property in Alexandria, Virginia
(1225 First Street). The value not yet placed into service for The Maxwell at December 31, 2014 was $17.9 million. The value not yet placed into service for 1225 First Street at December 31, 2014 was $20.8 million. The Maxwell
was encumbered by a construction loan with a $27.7 million balance at December 31, 2014.
116
WASHINGTON REIT SUMMARY OF REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
The following is a reconciliation of real estate assets and accumulated depreciation for the three years ended December 31, 2014 (in thousands):
(in thousands)
Real estate assets
Balance, beginning of period
Additions:
Property acquisitions(1)
Improvements(1)
Deductions:
Impairment write-down
Write-off of disposed assets
Property sales
Balance, end of period
Accumulated depreciation
Balance, beginning of period
Additions:
Depreciation
Deductions:
Impairment write-down
Write-off of disposed assets
Property sales
Balance, end of period
(1)
Includes non-cash accruals for capital items and assumed mortgages.
Year Ended December 31,
2014
2013
2012
$2,289,509
$2,529,131
$2,449,872
289,140
98,250
—
(2,857)
(126,854)
$2,547,188
47,444
71,127
—
(2,017)
(356,176)
$2,289,509
47,772
59,664
(2,097)
(1,450)
(24,630)
$2,529,131
$ 611,408
$ 610,536
$ 535,732
77,741
—
(2,549)
(46,166)
80,510
—
(1,404)
(78,234)
84,949
—
(1,124)
(9,021)
$ 640,434
$ 611,408
$ 610,536
117
FORM 10-K Exhibit 31.1
CERTIFICATION
I, Paul T. McDermott, certify that:
1.
I have reviewed this annual report on Form 10-K of Washington Real Estate
Investment Trust;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such state-
ments were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for estab-
lishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f))for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our super-
vision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our super-
vision, to provide reasonable assurance regarding the reliability of finan-
cial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal con-
trol over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonable likely
to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the reg-
istrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reason-
able likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
DATE: March 2, 2015
/s/ Paul T. McDermott
Paul T. McDermott
Chief Executive Officer
118
WASHINGTON REIT
Exhibit 31.2
CERTIFICATION
I, Laura M. Franklin, certify that:
1.
I have reviewed this annual report on Form 10-K of Washington Real Estate
Investment Trust;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such state-
ments were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for estab-
lishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f))for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our super-
vision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our super-
vision, to provide reasonable assurance regarding the reliability of finan-
cial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal con-
trol over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonable likely
to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the reg-
istrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reason-
able likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
DATE: March 2, 2015
/s/ Laura M. Franklin
Laura M. Franklin
Executive Vice President
Accounting and Administration
(Principal Accounting Officer)
119
FORM 10-K
Exhibit 31.3
CERTIFICATION
I, William T. Camp, certify that:
1.
I have reviewed this annual report on Form 10-K of Washington Real Estate
Investment Trust;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such state-
ments were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for estab-
lishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f))for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our super-
vision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our super-
vision, to provide reasonable assurance regarding the reliability of finan-
cial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal con-
trol over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonable likely
to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the reg-
istrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reason-
able likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
DATE: March 2, 2015
/s/ William T. Camp
William T. Camp
Chief Financial Officer
(Principal Financial Officer)
120
WASHINGTON REIT
Exhibit 32
WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, the President and Chief Executive Officer, the Executive Vice President Accounting, Administration and Corporate Secretary, and
the Chief Financial Officer of Washington Real Estate Investment Trust (“WRIT”), each hereby certifies on the date hereof, that:
(a)
the Annual Report on Form 10-K for the year ended December 31, 2014 filed on the date hereof with the Securities and Exchange Commission
(the “Report”) fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of WRIT.
Dated: March 2, 2015
/s/ Paul T. McDermott
Paul T. McDermott
Chief Executive Officer
Dated: March 2, 2015
/s/ Laura M. Franklin
Laura M. Franklin
Executive Vice President
Accounting and Administration
(Principal Accounting Officer)
Dated: March 2, 2015
/s/ William T. Camp
William T. Camp
Chief Financial Officer
(Principal Financial Officer)
121
FORM 10-K
Performance Graph
Set forth below is a graph comparing the cumulative total shareholder return
(assumes reinvestment of dividends) on Washington REIT shares with the
cumulative total return of companies making up the Standard & Poor’s 500
Stock Index and the MSCI US REIT Index. The MSCI US REIT Index is a
total-return index representing approximately 85% of the US REIT universe.
Comparison of Five Year Cumulative Total Return
2009
2010
2011
2012
2013
2014
Wash REIT
MSCI US REIT Index
S&P 500
$250
$200
$150
$100
$50
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WASHINGTON REIT Meet the new Washington REIT. We have launched a new corporate identity, relocated our headquarters to the city center and
taken significant first steps in 2014 to reshape our portfolio for the future by acquiring high quality properties in strong, metro-centric
locations. Our VISION is to become the best-in-class owner and operator of real estate in Washington, DC. We have a new
PASSION for quality and a deep understanding of our market. And we recognize that EXECUTION is everything. In
2014, we launched an aggressive strategic plan to transform our company for growth—and create value for our shareholders.
This is just the beginning.
CORPORATE INFORMATION
WRIT Direct
Washington REIT’s dividend reinvestment
plan permits cash investment of up to the
amount specified in the plan, plus dividend,
and is IRA eligible.
Stock Information
Washington REIT is traded on the New York
Stock Exchange. The trading symbol is WRE.
Member
National Association of
Real Estate Investment Trusts®
1875 Eye Street, NW, Suite 600
Washington, DC 20006-5413
Annual CEO Certification
Washington REIT submitted the CEO Certification
required by the NYSE under Section 303A.
12(a) without qualifications.
Corporate Headquarters
Washington REIT
1775 Eye Street, NW, Suite 1000
Washington, DC 20006
202.774.3200
800.565.9748
www.washreit.com
Counsel
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Independent Registered
Public Accounting Firm
Ernst & Young LLP
8484 Westpark Drive
McLean, Virginia 22102
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, Texas 77845-3170
Annual Meeting
Washington REIT will hold its annual meeting
on May 14, 2015, at 8:30 a.m. at its corporate
office, 1775 Eye Street, NW, Suite 1000,
Washington, DC 20006
FSC FPO
Make As Small
As Possible
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©
ANNUAL REPORT 2014
VISION PASSION EXECUTION
1775 Eye Street, NW, Suite 1000, Washington, DC 20006 202.774.3200 800.565.9748 www.washreit.com
Washington Real Estate Investment Trust now does business under the name Washington REIT.