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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-K
___________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 001-06622
___________________________________________________
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
___________________________________________________
Maryland 53-0261100
(State of incorporation) (IRS Employer Identification Number)
1775 EYE STREET, NW, SUITE 1000, WASHINGTON, DC 20006
(Address of principal executive office) (Zip code)
Registrant’s telephone number, including area code: (202) 774-3200
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Shares of Beneficial Interest WRE NYSE
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 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
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, 2020, the aggregate market value of such shares held by non-affiliates of the registrant was $1,811,606,216 (based on the closing price of the stock on June 30, 2020).
As of February 11, 2021, 84,559,065 common shares were outstanding.
___________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement relating to the 2021 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.



WASHINGTON REAL ESTATE INVESTMENT TRUST
2020 FORM 10-K ANNUAL REPORT
INDEX
 
PART I
  
  Page
Item 1. Business
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Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures


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PART I

ITEM 1:  BUSINESS

WashREIT Overview

Washington Real Estate Investment Trust (“WashREIT”) 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 estate properties in the greater Washington metro region. We own a portfolio of multifamily and commercial (office and retail) properties.
Our strategy is to generate returns and maximize shareholder value through proactive asset management and prudent capital allocation decisions. Consistent with this strategy, we invest in additional income producing properties through acquisitions, development and redevelopment. We invest in properties where we believe we will be able to improve the operating results and increase the value of the property. We focus on properties in the Washington metro region, near major transportation nodes and in areas with strong employment drivers and superior growth demographics. We will seek to continue to upgrade our portfolio as opportunities arise, funding development and acquisitions with a combination of cash, equity, debt and proceeds from property sales.

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 replicate our strategy in other geographic markets which meet the criteria described above.

Our Regional Economy and Real Estate Markets

The Washington metro region continues to slowly recover from the economic shock resulting from the COVID-19 pandemic. Positive monthly job growth through November 2020 brought back much of the Washington metro region’s jobs that were initially lost in the spring. However, the 12-month job growth figure remains sharply negative at approximately 179,700 net job losses, according to Delta Associates / Transwestern Commercial Services (“Delta”), a national full-service real estate firm that provides market research and evaluation services for commercial property.

Payroll Job Growth
Major Metro Areas
12 Months Ending November 2020
WRE-20201231_G1.JPG
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Source: U.S. Bureau of Labor Statistics; January 2021


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The unemployment rate in the Washington metro region was 5.8% in November 2020, a 300-basis point increase over November 2019, but 400 basis points less than the pandemic peak of 9.8% in April, according to Delta. The Washington metro region retains one of the lowest unemployment rates in the country and is well under the national unemployment rate of 6.4%, according to Delta.

Unemployment Rate
Major Metro Areas
November 2020 vs. November 2019
WRE-20201231_G2.JPG
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Source: U.S. Bureau of Labor Statistics; January 2021

Certain market statistics and information from several third-party providers for the Washington metro region are set forth below:

Multifamily

The multifamily real estate market had lower effective rents and occupancy rates in 2020, reflecting disruption from the COVID-19 pandemic, according to statistics from RealPage Market Analytics, a commercial real estate management software company that provides market research:

Year-Over-Year                        Year-Over-Year
Apartment Effective Rent Change                Apartment Occupancy
Washington Metro 2020 vs. 2019                 Washington Metro 2020 vs. 2019

WRE-20201231_G3.JPG WRE-20201231_G4.JPG
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Source: RealPage Market Analytics; January 2021

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Demand in the Washington metro region has continued to fall since the pandemic began, a trend also seen among some of the nation’s gateway markets (i.e., San Francisco, Los Angeles, New York City and Boston).

The development pipeline for the Washington metro region remains elevated and is expected to suppress occupancy and rental rates in 2021 as approximately 14,800 new deliveries are expected while approximately 32,000 units are under construction.

Class A (1) properties are expected to struggle the most as new lease-ups should create significant competition throughout 2021. Class B (2) properties, especially properties located in suburban areas, have outperformed Class A properties during the COVID-19 pandemic and are expected to continue to outperform Class A units as no new supply of Class B units are expected to be added to the market in 2021.
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(1)     Defined by Delta as product generally built in 1995 or later and offering a separate clubhouse, decorated model units, two bedroom/ two bath units, and a large community amenity package most often including a fitness center and swimming pool.
(2)Defined by Delta as product that is well maintained, older, generally built in the 1960’s or 1970’s, and which does not offer a separate clubhouse nor decorated model unit nor two bedroom/two bathroom floor plans. Class B communities typically offer limited project amenities.


Office
Washington Metro Region 2020 2019
Average asking rent per square foot $ 43.72  $ 43.30 
Total vacancy rate at year end 18.7  % 16.1  %
Net absorption (in millions of square feet) (1)
(5.2) 4.5 
Office space under construction at year end (in millions of square feet) 7.0  9.8 
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(1)     Net absorption is defined as the change in occupied, standing inventory from one year to the next.
Source: Jones Lang LaSalle ("JLL"), a commercial real estate services firm

The Washington metro region's office market performance in 2020 reflected the stress of the COVID-19 pandemic. Total vacancy rose to 15.8% in Washington, D.C. and 20.0% in Northern Virginia, according to JLL. Direct asking rents remained relatively stable, as landlords increased focus on concessions to secure transactions. Net effective rents declined by approximately 12.5% in Washington, D.C. and 25% in Northern Virginia. Leasing volume declined across the Washington metro region. In Washington, D.C., overall leasing volume decreased by 49% compared to 2019, with renewals representing over two-thirds of the annual volume. In Northern Virginia, despite a record year for government contract awards, leasing volume was down 32% year over year. In the second half of 2020, renewals accounted for 68% of leasing volume in Northern Virginia as tenants continue to delay space decisions. Construction has slowed in Washington, D.C. as 2.7 million square feet is under construction, with 56% pre-leased. In Northern Virginia, 677,000 of the 5 million square feet of space under construction is available for lease, with 64% of the space owner-built, 21% build to suit and 15% speculative development.

Historically, there has been a positive correlation between political alignment in the federal government and leasing in the Washington metro region for the office market. For example, since 2000, aligned government correlated to 14.9 million square feet of absorption compared to periods of divided government, which resulted in only 5.7 million square feet of absorption in Washington, D.C. JLL notes that elevated contract awards under a new presidential administration could provide a lift to the market over the intermediate term, particularly in Northern Virginia, but the actual effect remains to be seen. In the near term, elevated vacancy and subdued leasing demand will drive office leasing performance metrics.

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Our Portfolio

As of December 31, 2020, we owned a diversified portfolio of 43 properties, totaling approximately 3.4 million square feet of commercial space and 7,059 residential units and land held for development. These 43 properties consist of 22 multifamily properties, 13 office properties and 8 retail centers. The percentage of total real estate rental revenue from continuing operations by property type for the three years ended December 31, 2020, 2019 and 2018, and the percent leased as of December 31, 2020, were as follows:
Percent Leased at
December 31, 2020(1)
  % of Total Real Estate Rental  Revenue
  2020 2019 2018
92% Multifamily 49  % 41  % 33  %
87% Office 45  % 53  % 61  %
89% Other % % %
100  % 100  % 100  %
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(1)     Calculated as the percentage of physical net rentable area leased, except for multifamily, which is calculated as the percentage of units leased. The net rentable area leased for office and retail properties includes temporary lease agreements.

On a combined basis, our commercial portfolio (i.e., our office and retail properties, excluding properties classified as discontinued operations) was 87%, 93% and 93% leased at December 31, 2020, 2019 and 2018, respectively.

Total real estate rental revenue from continuing operations for each of the three years ended December 31, 2020 was $294.1 million, $309.2 million and $291.7 million, respectively. During the three years ended December 31, 2020, we acquired eight multifamily properties and one office property, and substantially completed major construction activities at one retail redevelopment project and one multifamily development project. During that same period, we sold eight retail properties and seven office properties. See note 14 to the consolidated financial statements for further discussion of our operating results by segment.


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The commercial lease expirations for the next ten years and thereafter are as follows:
# of Leases Square Feet Gross Annual Rent
(in thousands)
Percentage of Total Gross Annual Rent
Office:
2021 49  205,717  $ 8,644  %
2022 46  375,218  18,663  15  %
2023 55  317,740  16,101  13  %
2024 52  257,568  14,188  11  %
2025 43  190,367  10,461  %
2026 28  183,715  11,163  %
2027 25  273,483  18,047  14  %
2028 16  78,455  4,989  %
2029 12  50,801  3,074  %
2030 13  120,279  7,660  %
Thereafter 16  175,724  12,621  11  %
Total 355  2,229,067  $ 125,611  100  %
Other:
2021 11  70,127  $ 1,368  %
2022 14  92,934  1,934  13  %
2023 18  65,858  1,630  11  %
2024 17  134,586  3,172  21  %
2025 11  79,292  1,476  10  %
2026 29,239  968  %
2027 47,611  1,109  %
2028 21,582  785  %
2029 18,133  913  %
2030 21,831  607  %
Thereafter 13,415  917  %
Total 100  594,608  $ 14,879  100  %

According to Delta, the professional/business services and government sectors constituted over 45% of payroll jobs in the Washington metro region at the end of 2020. Due to our geographic concentration in the Washington metro region, a significant number of our tenants have historically been concentrated in the professional/business services and government sectors, although the exact number will vary from time to time. As a result of this concentration, we are susceptible to business trends (both positive and negative) that affect the outlook for these sectors.

No single tenant accounted for more than 3% of real estate rental revenue in 2020 and no more than 5% in 2019 or 2018. All federal government tenants in the aggregate accounted for less than 1% of our real estate rental revenue in 2020.

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Our ten largest commercial tenants, in terms of real estate rental revenue for 2020, are as follows:
1. Atlantic Media, Inc.
2. Capital One, N.A.
3. EIG Management Company, LLC
4. B. Riley Financial, Inc.
5. Epstein, Becker & Green, P.C.
6. Hughes Hubbard & Reed LLP
7. Morgan Stanley Smith Barney Financing
8. Promontory Interfinancial Network, LLC
9. Graham Holdings Company
10. Raytheon BBN Technologies Corporation

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 properties. Bozzuto Management Company ("Bozzuto") and Greystar Real Estate Partners ("Greystar") currently provide property management and leasing services at our multifamily properties. Bozzuto and Greystar provide such services under individual property management agreements for each property, each of which is separately terminable by us or Bozzuto/Greystar, as applicable. Although they vary by property, on average, the fees charged by the service provider under each agreement are approximately 3% of revenues at each property.

We expect to continue investing in additional income-producing properties through acquisitions, development and redevelopment and plan to allocate more capital to multifamily as an asset class over time than we currently allocate. We invest in properties where we believe we will be able to improve the operating results and increase the value of the property. Our properties typically compete for residents and tenants with other properties 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. However, we reduced our capital improvement spending for the year ended December 31, 2020 as a cost-saving measure due to the COVID-19 pandemic. Major improvements and/or renovations to the properties during the three years ended December 31, 2020 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 properties is contained in Item 2, Properties, and note 14 to the consolidated financial statements, 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.

Human Capital

Employees, Training and Development

On February 11, 2021, we had 112 employees including 48 persons engaged in property management functions and 64 persons engaged in corporate, financial, leasing, asset management and other functions. All of our officers and substantially all of our employees live and work in or near the greater Washington metro region.

Our human capital resources objectives include identifying, recruiting, retaining, incentivizing and integrating our existing and new employees. At WashREIT, we place great value on employee growth through goals, feedback and professional and leadership development offerings. Our leadership courses are internally developed and delivered through multi-session, cohort-based experiential learning environments and are offered to employees at multiple levels. A certified executive leadership coach provides ongoing development support for leadership program participants and the employee population at large. We financially support employees pursuing industry-specific training and certification programs. Also, we encourage individuals to join professional organizations that offer technical, soft skill and leadership development workshops.

We also survey our employees regularly on a variety of topics including strategic initiatives, employee engagement, diversity, town hall meetings, community service, and others and incorporate the feedback to ensure our programs and initiatives are best serving employee needs.

Additionally, our equity and cash incentive plans are designed to attract, retain and reward our workforce through the granting
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of stock-based and cash-based compensation awards, with the goal of motivating such individuals to perform to the best of their abilities and achieve our objectives, including increasing stockholder value.

Health, Safety and Well-being

We support our employees with a robust employee benefits program, including a flexible vacation policy, parental leave, 401(k) matching, tuition reimbursement, an Employee Assistance Program, and other programs.

Additionally, we have a wellness program that provides fun, engaging challenges to encourage employees to continuously improve their physical, mental, and financial well-being. Programs we run throughout the year include biometric screenings, personal finance check-ups, and healthy lunch challenges. In our corporate offices, we recently improved our wellness room by doubling the space for employees to take a break to decompress. The rooms also provide nursing mothers a peaceful place to meet their needs.

Our technological advances and multiple properties around the DC metro area allow our teams the flexibility to work from anywhere that suits their needs at any time. This allows us to easily meet our tenants’ needs as well as those of our employees, which has been especially important during the COVID-19 pandemic.

Diversity and Inclusion

WashREIT’s Diversity, Equity, Inclusion, and Belonging Initiative ("DEIB") is a long-term commitment to promote an environment where each individual feels comfortable being their most authentic selves. We believe diversity of backgrounds, experiences, cultures, ethnicities, and interests leads to new ways of thinking and drives organizational success. Our diverse 17 member DEIB Council is overseen by WashREIT’s senior leadership team and Board of Trustees. The DEIB Council both tracks and monitors our diversity metrics and facilitates learning and training opportunities that include: Diversity Speaker Series, targeted recruitment and relationship development of historically black colleges and universities and other diverse industry groups for internships, annual inclusion and belonging employee survey, partnership with diverse local non-profit to provide tutoring for school aged children among others.

Community Engagement

As a real estate investment trust, investing is at the core of what we do. But the most valuable investments we make are not in our buildings—they are in our people and our community. With more than five decades of experience operating exclusively in the Washington metro region, we’re passionate about making a difference in the region we call home.

We are committed to improving the lives of those in need, and our employees participate in a wide variety of philanthropic activities throughout the year. Whether volunteering at a food bank, running a toy drive, walking for a cause, or participating in our company-wide community service day, we’re proud to foster a culture of giving back.

Regulation

REIT Tax Status

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

Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate U.S. federal, state and local income tax on their taxable income at regular statutory rates (see note 1 to the consolidated financial statements for further disclosure).

Americans with Disabilities Act ("ADA")

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The properties in our portfolio must comply with Title III of the ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily accessible accommodations is an ongoing one, and we will continue to assess our properties and make alterations as appropriate in this respect.

Fair Housing Act ("FHA")

The FHA, its state law counterparts and the regulations promulgated by the U.S. Department of Housing and Urban Development and various state agencies, prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under 18) or handicap (disability) and, in some states, financial capability or other bases. A failure to comply with these laws in our operations could result in litigation, fines, penalties or other adverse claims, or could result in limitations or restrictions on our ability to operate, any of which could materially and adversely affect us. We believe that we operate our properties in substantial compliance with the FHA.

Environmental Matters

We are subject to numerous federal, state and local environmental, health, safety and zoning laws and regulations that govern our operations, including with respect to air emissions, wastewater, and the use, storage and disposal of hazardous and toxic substances and petroleum products. If we fail to comply with such laws, including if we fail to obtain any required permits or licenses, we could face substantial fines or possible revocation of our authority to conduct some of our operations.

In addition, under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under, or migrating from such property, including costs to investigate and clean up such contamination and liability for natural resources damage. In addition, we also may be liable for the costs of remediating contamination at off-site waste disposal facilities to which we have arranged for the disposal or treatment of hazardous substances, without regard to whether we complied with environmental laws in doing so. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required remediation, removal, fines, or other costs could exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or bodily injury or property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such 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 require substantial expenditures.

Availability of Reports

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 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.

The Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy statements, information statements, and other information regarding issuers that file electronically with Securities and Exchange Commission.
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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 WashREIT 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 statements beginning on page 43.
Risks Related to the novel coronavirus (COVID-19)

The current outbreak of COVID-19, and the resulting volatility it has created, has disrupted our business and we expect that the COVID-19 pandemic, will significantly and adversely impact our business, financial condition and results of operations going forward, and that other potential pandemics or outbreaks, could materially adversely affect our business, financial condition, results of operations and cash flows in the future. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an unknown magnitude and duration.

Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

The COVID-19 pandemic has had, and COVID-19, any mutation thereof, and any future pandemic will continue to have repercussions across regional and global economies and financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States (including the states and cities that comprise the Washington metro region, where we own properties and have development sites), have at times also instituted quarantines, shelter-in-place rules, and restrictions on travel, the types of business that may continue to operate, and/or the types of construction projects that may continue. As a result, the COVID-19 pandemic is negatively impacting most industries, both inside and outside the Washington metro region, directly or indirectly. Since the beginning of the pandemic, a number of our commercial tenants have announced temporary closures of their offices or stores and requested rent deferral or rent abatement. In addition, jurisdictions in the Washington metro region have implemented or may implement rent freezes or other similar restrictions. The full extent of the impact on our business is largely uncertain and dependent on a number of factors beyond our control, including a potential increase in the number of cases in the Washington metro region, as a result of this year's flu season or otherwise.

The COVID-19 outbreak has caused and continues to cause severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration. COVID-19 has disrupted our business and is expected to continue to have a significant adverse effect on our business, financial performance and condition, operating results and cash flows due to, among other factors:

a decrease in real estate rental revenue (our primary source of operating cash flow), as a result of temporary rent increase freezes impacting new and renewal rental rates on multifamily properties, longer lease-up periods for both anticipated and unanticipated vacancies, including as a result of a shift from physical to virtual tours, lower revenue recognized as a result of the waiver of late fees and a reduction in parking revenue, as well as our tenants’ ability and willingness to pay rent, increased credit losses, and our ability to continue to collect rents, on a timely basis or at all (for example, 1% of contractual cash rents in our office portfolio, 3% of contractual cash rents in our retail portfolio and 1% of contractual cash rents in our multifamily portfolio were uncollected for the fourth quarter of 2020, as of January 31, 2021);
a complete or partial closure of one or more of our properties resulting from government or tenant action (as of February 11, 2021, all of our commercial properties are operating on a limited basis pursuant to local government orders, except for essential businesses);
reductions in demand for commercial space in the Washington metro region and the inability to provide physical tours of either our commercial and multifamily spaces may result in our inability to renew leases, re-lease space as leases expire, or lease vacant space, particularly without concessions, or a decline in rental rates on new leases, particularly at our retail assets;
the inability of one or more major tenants or a significant number of smaller tenants to pay rent, or the bankruptcy or insolvency of one or more major tenants or a significant number of smaller tenants, due to a downturn in their businesses or a weakening of financial condition related to the pandemic;
the inability to decrease certain fixed expenses at our properties despite decreased operations at such properties;
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the inability of our third-party service providers to adequately perform their property management and/or leasing activities at our properties due to decreased on-site staff or other COVID-19-related challenges;
difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions, which may affect our access to capital and our commercial tenants' ability to fund their business operations and meet their obligations to us;
the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of debt agreements;
a decline in the market value of real estate in the Washington metro region may result in the carrying value of certain real estate assets exceeding their fair value, which may require us to recognize an impairment to those assets;
future delays in the supply of products, services or liquidity may negatively impact our ability to complete the development, redevelopment, renovations and lease-up of our properties on schedule or for their original estimated cost;
loss of cash balances that we periodically invest in a variety of short-term investments in order to preserve principal and maintain a high degree of liquidity while providing current income could result in a lower level of liquidity;
a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow or change the complexion of our portfolio of properties;
our insurance may not cover loss of revenue or other expenses resulting from the pandemic and related shelter-in-place rules;
unanticipated costs and operating expenses and decreased anticipated and actual revenue related to compliance with regulations, such as additional expenses related to staff working remotely, requirements to provide employees with additional mandatory paid time off and increased expenses related to sanitation measures performed at each of our properties, as well as additional expenses incurred to protect the welfare of our employees, such as expanded access to health services;
the potential for our employees, particularly our key personnel and property management teams, to become sick with COVID-19 which could adversely affect our business;
the increased vulnerability to cyber-attacks or cyber intrusions while employees are working remotely has the potential to disrupt our operations or cause material harm to our financial condition; and
complying with REIT requirements during a period of reduced cash flow could cause us to liquidate otherwise attractive investments or borrow funds on unfavorable conditions.

The significance, extent and duration of the impact of COVID-19 remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time, such as a potential increase in cases in the Washington metro region, the continued severity, duration, transmission rate and geographic spread of COVID-19, the extent and effectiveness of the containment measures taken, the timing, effectiveness and availability of vaccines, and the response of the overall economy, the financial markets and the population, particularly in the Washington metro region, once the current containment measures are lifted.

The ongoing volatility of this situation may limit our ability to make predictions as to the ultimate adverse impact of COVID-19 on us. As a result, we cannot provide an estimate of the overall impact of the COVID-19 pandemic on our business or when, or if, we will be able to resume normal operations. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results and cash flows.

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 make distributions to our shareholders.

Our financial performance and the value of our real estate assets are subject to the risk that our properties do not generate revenues sufficient to meet our operating expenses, debt service and capital expenditures, which could cause our cash flow and ability to make distributions to our shareholders to be adversely affected. The following factors, among others, may adversely affect the cash flow generated by our multifamily and commercial properties:

declines in the financial condition of our tenants;
significant job losses in the professional/business services industries or government;
competition from similar asset class properties;
local real estate market conditions, such as oversupply or reduction in demand for multifamily and commercial properties; and
civil disturbances, earthquakes and other natural disasters, terrorist acts or acts of war.

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Additionally, complying with the REIT requirements may cause us to forgo and/or liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amount available for distribution to shareholders. Thus, compliance with the REIT requirements may hinder our ability to make, or, in certain cases, maintain ownership of, certain attractive investments.

We may also face potential adverse effects from bankruptcies or insolvencies of major tenants and could face potential difficulties in leasing or re-leasing such tenants' associated space.

Lastly, 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 properties. 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.

Any of these events could affect our cash flow and ability to make distributions to our shareholders.

We are dependent upon the economic and regulatory climate of the Washington metro region, which may impact our profitability and may limit our ability to meet our financial obligations when due and/or make distributions to our shareholders.

All of the properties in our portfolio are located in the Washington metro region and such concentration may expose us to a greater amount of market dependent risk than if we were geographically diverse. General economic conditions and local real estate conditions 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 susceptible to adverse developments in the Washington, D.C. regulatory environment, such as increases in real estate and other taxes, the costs of complying with governmental regulations or increased regulations and actual or threatened reductions in federal government spending and/or changes to the timing of government spending, as has occurred during federal government shutdowns. In the event of negative economic 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.

The composition of our portfolio by asset class may change over time, which could expose us to different asset class risks than if our portfolio composition remained static.

We own multifamily and commercial assets, with multifamily and office representing approximately 94% of our net operating income for the year ended December 31, 2020, and approximately 93% of our portfolio based on square footage as of December 31, 2020. If the composition of our portfolio changes, then we would become more exposed to the risks and markets of other asset classes. If we are successful in executing the strategic capital allocation plan, then we will become more exposed to the risks of the multifamily and office markets, any of which could have a material adverse effect on us.

We may be adversely affected by any significant reductions in federal government spending or actual or threatened changes to the timing of federal government spending, which could have an adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our shareholders.

As a REIT focused on the Washington metro region, a significant portion of our properties is occupied by tenants that directly or indirectly serve the U. S. Government as federal contractors or otherwise. A significant reduction in federal government spending, particularly a sudden decrease due to a sequestration process or due to extended uncertainty in the political climate in a way that affects the federal appropriations process by decreasing, delaying or making uncertain the results, stability and timing of federal appropriations, 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, economic 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 an actual or anticipated significant reduction in federal government spending or change in the timing of federal government spending, there could be negative economic changes in our region, which could adversely impact the ability of our tenants to meet their financial obligations under our leases or the likelihood of their lease renewals. As a result, if such a reduction in federal government spending or actual or threatened change to the timing of federal government spending were to occur or be anticipated for an extended period, we could experience an adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our shareholders.


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We face potential difficulties or delays renewing leases or re-leasing space, and as a result, our financial condition, results of operations, cash flow and our ability to satisfy our principal and interest obligations and to make distributions to our shareholders could be adversely affected.

As of December 31, 2020, the percentage of leased square footage of our commercial properties scheduled to expire is as set forth in the lease expiration tables on page 8, with a total of 26% and 27% of our office and retail leases scheduled to expire in the two years following December 31, 2020. Multifamily properties are leased under operating leases with terms of generally one year or less. For each the three years ended December 31, 2020, 2019 and 2018, the multifamily tenant retention rate was 54%, 55%, and 55%, respectively.

Difficulties or delays renewing leases or releasing space, including as a result of our inability to provide physical tours of either our commercial and multifamily spaces as a result of COVID-19, could impact our financial condition and ability to make distributions to our shareholders. We derive substantially all of our income from rent received from tenants. If our tenants decide not to renew their leases, we may face delays or difficulties re-leasing the space. If tenants decide to renew their leases, the terms of renewals, including the cost of required improvement allowances or concessions, may be less favorable to WashREIT than current lease terms. If the rental rates of our properties decrease, our existing tenants do not renew their leases (refer to the list of our ten largest tenants as of December 31, 2020 in "Part I - Item 1. Business", which collectively represented 12% of our revenue for the year ended December 31, 2020) 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 obligations and to make distributions to our shareholders could be adversely affected.

Occupancy levels and market rents at our multifamily properties could be negatively affected by competition with other housing alternatives and various political, economic and market conditions, which could adversely affect our results of operations and our financial condition.

Our multifamily properties compete with numerous housing alternatives in attracting residents, including owner occupied single and multifamily homes. Occupancy levels and market rents may be adversely affected by national and local political, economic and market conditions including, without limitation, migration to areas outside of major metropolitan areas like the Washington metro region, where our portfolio is concentrated, new construction and excess inventory of multifamily and owned housing/condominiums, increasing portions of owned housing/condominium stock being converted to rental use, rental housing subsidized by the government, other government programs that favor single family rental housing or owner occupied housing over multifamily rental housing, governmental regulations, slow or negative employment growth and household formation, the availability of low-interest mortgages or the availability of mortgages requiring little or no down payment for single family home buyers, changes in social preferences and the potential for geopolitical instability, all of which are beyond our control. Finally, the federal government’s policies, many of which may encourage home ownership, can increase competition and could possibly limit our ability to raise rents in our markets and therefore lower the value of our properties. Competitive housing in a particular area and increased affordability of owner occupied single and multifamily homes could adversely affect our ability to retain our current residents, attract new ones or increase or maintain rents, which could adversely affect our results of operations and our financial condition.

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, especially if market conditions are not favorable. Such illiquidity could limit our ability to quickly change our portfolio of properties in response to changes in economic or other conditions. Moreover, the REIT tax laws require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer property sales that otherwise would be in our best interest. Due to these factors, we may be unable to sell a property at an advantageous time or on the terms anticipated which could negatively impact our profitability.

Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents and pass through new or increased operating costs to our tenants.

Certain states and municipalities, including Washington, D.C., 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 at our residential properties 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 operating costs, and any failure to comply with low- and moderate-income housing regulations could
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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 residential properties subject to such regulations. Furthermore, such regulations may negatively impact our ability to attract higher-paying tenants to such properties. As of December 31, 2020, two of our residential properties were subject to such regulations.

We face risks associated with property development/redevelopment, which could have an adverse effect on our financial condition, results of operations or ability to satisfy our debt service obligations.

We may, from time to time, engage in development and redevelopment activities, some of which may be significant. Developing or redeveloping properties presents a number of risks for us, including risks relating to necessary permitting, risks relating to development and construction costs and/or permanent financing, risks relating to completing the project on schedule, or at all, and risks related to occupancy rates at the completed property.

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 activities once undertaken. The materialization of any of the foregoing risks could have an adverse effect on our financial condition, results of operations or ability to satisfy our debt service obligations.

We face risks associated with property acquisitions.

We may acquire properties which would increase our size and could alter our capital structure. In addition, 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 difficulty negotiating with new or existing tenants;
we may be unable to finance acquisitions on favorable terms or at all;
the occupancy levels, lease-up timing and rental rates of acquired properties may not meet our expectations;
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;
we may be unable to acquire a desired property at all or at the desired purchase price because of competition from other real estate investors, including publicly traded real estate investment trusts, institutional investment funds and private investors;
the timing of property acquisitions may lag the timing of property dispositions, leading to periods of time where projects' proceeds are not invested as profitably as we desire;
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;
we may assume liabilities for undisclosed environmental contamination;
our estimates of capital expenditures required for an acquired property, including the costs of repositioning or redeveloping, may be inaccurate and the acquired properties may fail to perform as we expected in analyzing our investments; and
we could experience a decline in value of the acquired assets after acquisition.

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.

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 properties. Currently, all of our multifamily properties are managed by third-party service providers. 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.

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Climate change and regulation regarding climate change in the Washington metro region may adversely affect our financial condition, results of operations, cash flows, per share market price of our common shares and our ability to satisfy our principal and interest obligations and to make distributions to our shareholders.

Climate change (including rising sea levels, flooding, extreme weather, and changes in precipitation and temperature), may result in physical damage to, a decrease in demand for and/or a decrease in rent from and value of our properties located in the areas affected by these conditions. Additionally, our insurance premiums may increase as a result of the threat of climate change or the effects of climate change may not be covered by our insurance policies.

Changes in federal and state legislation and regulations on climate change could result in utility expenses and/or capital expenditures to improve the energy efficiency of our existing properties or other related aspects of our properties in order to comply with such regulations or otherwise adapt to climate change. The District of Columbia, Arlington County, Virginia, Fairfax County, Virginia, and Montgomery County, Maryland, each have made formal public commitments to carbon reduction. To enforce this commitment, the Washington, D.C. City Council passed the DC Clean Energy Omnibus bill. The bill requires that all electricity purchased in the District be renewable by 2032 and sets a building energy performance standard requiring certain buildings to meet certain minimum energy efficiency standards. Under the District of Columbia’s Building Energy Performance Standards, all existing buildings over 50,000 square feet will be required to reach minimum levels of energy efficiency or deliver savings by 2026, with progressively smaller buildings phasing into compliance over the following years. This regulation may require unplanned capital improvements, and increased engagement to manage occupant energy use, which is a large driver of building performance. If our properties cannot meet performance standards, they risk fines for non-compliance, as well as a decrease in demand and a decline in value. As a result, our financial condition, results of operations, cash flows, per share market 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.

Some potential losses are not covered by insurance, which could adversely affect our financial condition or cash flow.

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 March 2021 for our Assembly portfolio and August 2021 for all other properties. 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.

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 could adversely affect our financial condition or cash flow.

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 circumstances of the affected property it is possible that we could be liable for any mortgage indebtedness or other obligations related to the property. Any such loss could adversely affect our business and financial condition and results of operations. Additionally, any material increase in insurance rates or decrease in available coverage in the future could adversely affect our results of operations and financial condition.

Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.

All of the properties in our portfolio 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 relocate 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 properties on less favorable terms, or both. In addition, future terrorist attacks in or near Washington, D.C. could directly or indirectly damage such 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.

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Certain federal, state and local laws and regulations may cause us to incur substantial costs or subject us to potential liabilities.

We are subject to certain compliance costs and potential liabilities under various U.S. federal, state and local environmental, health, safety and zoning laws and regulations. These laws and regulations govern our and our tenants’ operations including with respect to air emissions, wastewater disposal, and the use, storage and disposal of hazardous and toxic substances and petroleum products, including in storage tanks that power emergency generators. If we fail to comply with such laws, including if we fail to obtain any required permits or licenses, we could face substantial fines or possible revocation of our authority to conduct some of our operations.

In addition, various environmental laws impose liability on a current or former owner or operator of real property for investigation, removal or remediation of hazardous or toxic substances or petroleum products at our currently or formerly owned or leased real property, regardless of whether or not we knew of, or caused, the presence or release of such substances. Liability under these laws may be joint and several, meaning that we could be required to bear 100% of the liability even if other parties are also liable. From time to time, we may be required to remediate such substances or remove, abate or manage asbestos, mold, radon gas, lead or other hazardous conditions at our properties. The presence or release of such toxic or hazardous substances or petroleum products at our currently owned or leased properties could result in limitations on or interruptions to our operations, and releases at our currently or formerly owned or leased properties could result in in third-party claims for bodily injury, property or natural resource damages, or other losses, including liens in favor of the government for costs the government incurs in cleaning up contamination. In addition, we also may be liable for the costs of remediating contamination at off-site waste disposal facilities to which we have arranged for the disposal, or treatment of hazardous substances without regard to whether we complied with environmental laws in doing so. It is our policy to retain independent environmental consultants to conduct Phase I environmental site assessments and asbestos surveys prior to our acquisition of properties. However, there is a risk that these assessments will not identify all potential environmental issues at a given property. Moreover, environmental, health and safety requirements have become increasingly stringent, and our costs may increase as a result. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our properties or result in significant additional expense and operating restrictions on our properties or adversely affect our ability to sell properties or to use properties as collateral.

We may also incur significant costs complying with other regulations. In addition, failure of our properties to comply with the Americans with Disabilities Act (“ADA”) could result in injunctive relief, fines, an award of damages to private litigants or mandated capital expenditures to remedy such noncompliance. Any imposition of injunctive relief, fines, damage awards or capital expenditures could adversely impact our business or results of operations. Our properties are subject to various other federal, state and local regulatory requirements, such as state and local fair housing, rent control and fire and life safety requirements. If we fail to comply with the requirements of the ADA or other federal, state and local regulations, we could be subject to fines, penalties, injunctive action, reputational harm and other business effects which could materially and negatively affect our performance and results of operations.

We face cybersecurity risks which have the potential to disrupt our operations, cause material harm to our financial condition, result in misappropriation of assets, compromise confidential information and/or damage our business relationships and can provide no assurance that the steps we and our service providers take in response to these risks will be effective.

We face cybersecurity risks, such as cyber-attacks, malware, social engineering, phishing schemes or bad actors inside our organization. The risk of a security breach or disruption, or another cyber-attack, including by computer hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks around the world have increased. These incidents may result in disruption of our operations, material harm to our financial condition, cash flows and the market price of our common shares, misappropriation of assets, compromise or corruption of confidential information collected in the course of conducting our business, liability for stolen information or assets, increased cybersecurity protection and insurance costs, regulatory enforcement, litigation and damage to our stakeholder relationships. These risks require increasing resources from us to analyze and mitigate, and there is no assurance that our efforts will be effective. Additionally, we rely on third-party service providers in our conduct of our business and we can provide no assurance that the security measures of those providers will be effective.

In the normal course of business, we and our service providers collect and retain certain personal information provided by our tenants, employees and vendors. We can provide no assurance that our data security measures will be able to prevent unauthorized access to this personal information. In addition to the risks discussed above related to a breach of confidential information, a breach of personal information may result in regulatory fines and orders, obligations to notify individuals or litigation risks.

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Risks Related to Financing

We face risks associated with the use of debt, including refinancing risk.

We rely on borrowings under our credit facility, mortgage notes, and debt securities to finance acquisitions and development activities and for general corporate purposes. In the past, the commercial real estate debt markets have experienced 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. These conditions, which increase the cost and reduce availability of debt, may continue to worsen in the future. 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 facility or to refinance existing debt financing, our financial condition and results of operations would likely be adversely affected. Similarly, global equity markets have experienced significant price volatility and liquidity disruptions in recent years, and similar circumstances could significantly and negatively impact liquidity in the financial market in the future. Any disruption could negatively impact our ability to access additional financing at reasonable terms or at all.

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 significant portion of our outstanding debt as it matures. There is a risk that we may 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. The materialization of any of the foregoing risks would adversely affect our financial condition and results of operations.

Our degree of leverage could limit our ability to obtain additional financing, affect the market price of our common shares or debt securities or otherwise adversely affect our financial condition.

On February 11, 2021, our total consolidated debt was approximately $1.0 billion. Using the closing share price of $23.53 per share of our common shares on February 11, 2021, multiplied by the number of our common shares, our consolidated debt to total consolidated market capitalization ratio was approximately 34% as of February 11, 2021.

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 downgraded 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.

Additionally, payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fully implement our capital expenditure, acquisition and redevelopment activities, or meet the REIT distribution requirements imposed by the Code.

Failure to effectively hedge against interest rate changes may adversely affect our financial condition, results of operations, cash flow, per share market price of our common shares and ability to make distributions to our shareholders and agreements we enter into to protect us from rising interest rates expose us to counterparty risk.

We enter into hedging transactions to protect ourselves from the effects of interest rate fluctuations on variable rate debt. Our hedging transactions include entering into agreements such as interest rate swaps, caps, floors and other interest rate exchange contracts. These agreements involve risks, such as the risk that such arrangements would not be effective in reducing our exposure to interest rate changes or that a court could rule that such an agreement is not legally enforceable. In addition, interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates. Failure to hedge effectively against interest rate changes could materially adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders. While such agreements are intended to lessen the impact of rising interest rates on us, they could also expose us to the risk that the other parties to the agreements would not perform, and that the hedging arrangements may not be effective in reducing our exposure to interest rate changes. In addition, the REIT provisions of the Code may limit use of certain hedging techniques that might otherwise be advantageous or
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push us to implement those hedges through a TRS, which would increase the cost of our hedging activities. Moreover, there can be no assurance that our hedging arrangements will qualify as highly effective cash flow hedges under Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging, or that our hedging activities will have the desired beneficial impact on our results of operations. Should we desire to terminate a hedging agreement, there could be significant costs and cash requirements involved to fulfill our obligation under the hedging agreement.

The future of the reference rate used in our existing floating rate debt instruments and hedging arrangements is uncertain, which could hinder our ability to maintain effective hedges and could adversely impact our business operations and financial results.

Our floating-rate debt and certain hedging transactions determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to another financial metric. Our existing hedging arrangements currently use LIBOR as a reference rate, as calculated for U.S. dollar (“USD-LIBOR”). As of December 31, 2020, we had approximately $250.0 million of debt outstanding that was indexed to LIBOR.

In July 2017, the United Kingdom regulator that oversees LIBOR announced its intention to phase out LIBOR rates by the end of 2021, indicating that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. In April 2018, the New York Federal Reserve commenced publishing an alternative reference rate to LIBOR, as calculated for the U.S. dollar (“USD-LIBOR”), the Secured Overnight Financing Rate (“SOFR”), proposed by a group of major market participants convened by the U.S. Federal Reserve with participation by SEC Staff and other regulators. In October 2020, after a number of industry consultations, the International Swaps and Derivatives Association published a LIBOR transition protocol.

We can provide no assurance regarding the future of LIBOR, whether our current hedging arrangements will continue to use USD-LIBOR as a reference rate or whether any reliance on such rate will be appropriate. Confusion as to the relevant benchmark reference rate for our hedging instruments could hinder our ability to establish effective hedges.

Despite progress made to date by regulators and industry participants to prepare for the anticipated discontinuation of LIBOR, significant uncertainties still remain. Such uncertainties relate to, for example, whether LIBOR will continue to be viewed as an acceptable market benchmark rate, what rate or rates may become accepted alternatives to LIBOR (various characteristics of SOFR make it uncertain whether it would be viewed by market participants as an appropriate alternative to USD-LIBOR for certain purposes), how any replacement would be implemented across the industry, and the effect any changes in industry views or movement to alternative benchmarks would have on the markets for LIBOR-linked financial instruments.

We can provide no assurance regarding the future of LIBOR and when our current floating rate debt instruments and hedging arrangements will transition from LIBOR as a reference rate to SOFR (in the case of our floating rate debt instruments and hedging arrangements that determine the applicable interest rate or payment amount by reference to LIBOR-USD as a reference rate) or another reference rate. The discontinuation of a benchmark rate or other financial metric, changes in a benchmark rate or other financial metric, or changes in market perceptions of the acceptability of a benchmark rate or other financial metric, including LIBOR, could, among other things result in increased interest payments, changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market volatility, adverse tax or accounting effects, increased compliance, legal and operational costs, and risks associated with contract negotiations. In addition, confusion related to the transition from USD-LIBOR to SOFR or another replacement reference rate for our floating debt and hedging instruments could have an uncertain economic effect on these instruments, hinder our ability to establish effective hedges and result in a different economic value over time for these instruments than they otherwise would have had under USD-LIBOR.

Covenants in our debt agreements could adversely affect our financial condition.

Our credit facility and other debt instruments contains customary restrictions, requirements and other limitations on our ability to incur indebtedness. We must maintain certain ratios, including a maximum of total indebtedness to total asset value, a maximum of secured indebtedness to total asset value, a minimum of quarterly adjusted EBITDA to fixed charges, a minimum net operating income from unencumbered properties to unsecured interest expense, a maximum of unsecured indebtedness to unencumbered asset value and a minimum of total unencumbered assets to total unsecured indebtedness. Our ability to borrow under our credit facility is subject to compliance with our financial and other covenants.

Failure to comply with any of the covenants under our unsecured credit facility or other debt instruments (including our indenture and our notes purchase agreement) could result in a default under one or more of our debt instruments. If we fail to comply with the covenants in our unsecured credit facility or other debt instruments, other sources of capital may not be
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available 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.

Any default or cross-default events could cause our lenders to accelerate the timing of payments 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 WashREIT, even if such a change in control may be in the best interest of our shareholders, 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 profiting 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 affiliate 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
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.

Our bylaws currently provide that the foregoing provision regarding "control share acquisitions" will not apply to WashREIT. 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 WashREIT.

Additionally, Title 8, Subtitle 3 of the MGCL permits our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain takeover defenses. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common shareholders with the opportunity to realize a premium over the then current market price.

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.

The ownership of our shares must be restricted in several ways in order for us to maintain our qualification as a REIT under the Code. Our charter provides that no person (other than an excepted holder, as defined in our charter) may actually or constructively own more than 9.8% of the aggregate of our outstanding common shares by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the equity shares by value.

Our board of trustees has the authority under our charter to reduce these share ownership limits. Our board of trustees may, in its sole discretion, grant exemptions to the share ownership limits, subject to such conditions and the receipt by our board of trustees of certain representations and undertakings to ensure that our REIT qualification is not adversely affected. In addition to 9.8% (or any lower future percentage) share ownership limits, our charter also prohibits any person from (a) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, our equity shares that would result in us 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 equity shares if such transfer would result in our equity shares being owned by fewer than 100 persons.

The share ownership limits contained in our charter are based on the ownership at any time by any “person,” which term includes entities and certain groups. The share ownership limitations in our charter are common in REIT charters and are intended to provide added assurance of compliance with the tax law requirements. However, the share ownership limits on our shares and our enforcement of them might delay, defer, prevent, or otherwise inhibit a transaction or a change in control of WashREIT, including a transaction that might involve a premium price for our common shares or that might otherwise be in the best interest of our shareholders.

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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.

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 WashREIT, 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, 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 and the failure to do so could have an adverse effect on the market price of our common shares.

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 common shares at their current rate or to increase our common share dividend rate will depend on a number of factors, including, among others, our future financial condition and results of operations and the terms of our debt covenants.

Our board of trustees considers, among other factors, trends in our levels 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. If some or all of these factors were to trend downward for a sustained period of time, our board of trustees could determine to 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.

Additionally, the market value of our securities can be adversely affected by many factors, including certain factors related to our REIT status.

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:

level of institutional interest in us;
perceived attractiveness of investment in us, in comparison to other REITs;
perceived attractiveness of the Washington metro region, particularly if investors have a negative sentiment about the impact of election results on the region's economy;
attractiveness of securities of REITs in comparison to other asset classes taking into account, among other things, that a substantial portion of REITs’ dividends may be 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 uncertainty, action or regulation;
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;
22


uncertainty around and changes in U.S. 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.

Risks Related to our Status as a REIT

The loss of our tax status as a REIT would have significant adverse consequences 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, our charter provides that our board of trustees may revoke or otherwise terminate 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. Furthermore, we cannot assure you that we are qualified as a REIT, or that we will remain qualified as a REIT 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 "REIT taxable income" (determined before the deduction for dividends paid and excluding net capital gains) on an annual basis.

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.

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 U.S. federal income tax at the regular corporate rate, without any deduction for dividends paid to shareholders in computing our taxable income, and possibly increased state and local taxes; and

unless we are entitled to relief under statutory provisions, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.

This treatment would reduce net earnings available for investment or distribution to shareholders because of the additional tax liability for the year (or years) involved. To the extent that distributions to shareholders had been made based on the assumption of our qualification 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.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from "qualified dividends" payable by non-REIT C corporations to U.S. shareholders that are individuals, trusts or estates generally is 20% (excluding the 3.8% net investment income tax). Dividends payable by REITs, however, generally are not eligible for the maximum 20% reduced rate and are taxed at applicable ordinary income tax rates, except to the extent that certain holding requirements have been met and a REIT's dividends are attributable to dividends received by a REIT from taxable corporations (such as a TRS), to income that was subject to tax at the REIT/corporate level, or to dividends properly designated by the REIT as “capital gain dividends.” For taxable years beginning before January 1, 2026, U.S. shareholders that are individuals, trusts or estates may deduct 20% of their dividends from REITs (excluding qualified dividend income and capital gains dividends). For those U.S. shareholders in the top marginal tax bracket of 37%, the deduction for REIT dividends yields an effective income tax rate of 29.6% (exclusive of the net investment income tax) on REIT dividends, which is higher than the 20% tax rate on qualified dividend income paid by non-REIT C corporations (although the maximum effective rate applicable to such dividends, after taking into account the 21% U.S. federal income tax rate applicable to non-REIT C corporations is 36.8% (exclusive of the 3.8% net investment income tax)). Although the reduced rates applicable to dividend income from non-REIT C corporations do not adversely affect the taxation of REITs or dividends payable by REITs, these reduced rates could cause investors who are non-corporate taxpayers to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT C corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common shares.
23



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 without regard to the deduction for dividends paid and excluding net capital gains. In addition, we will be subject to U.S. federal income tax at the regular corporate rate (currently 21%) 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 U.S. federal income tax laws. We intend to continue to distribute our net income to our shareholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid U.S. 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 nondeductible 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 U.S. 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 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 U.S. 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.

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 U.S. 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. Moreover, if we have net income from "prohibited transactions," that income will be subject to a 100% tax. The need to avoid prohibited transactions could cause us to forego or defer sales of properties that might otherwise be in our best interest to sell. 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 obligations and distributions to shareholders. Our TRSs generally will be subject to U.S. federal, state and local corporate income tax on their net taxable income.

There is a risk of changes in the tax law applicable to REITs which may adversely affect our taxation as a REIT and taxation of our shareholders.

The IRS, the United States Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations and other guidance. We cannot predict whether, when or to what extent new U.S. 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 our taxation or taxation of our shareholders. We urge you to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common shares.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.
24



ITEM 2: PROPERTIES

The schedule on the following pages lists our real estate investment portfolio as of December 31, 2020, which consisted of 43 properties and land held for development.

As of December 31, 2020, 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.

Schedule of Properties
Properties Location Year Acquired Year Constructed/Renovated # of Units Net Rentable Square Feet
Percent Leased, as of December 31, 2020 (1)
Ending Occupancy, as of December 31, 2020 (1)
Multifamily Properties        
Clayborne Alexandria, VA 2003 2008 74  60,000  98.6  % 98.6  %
Riverside Apartments Alexandria, VA 2016 1971 1,222  1,001,000  96.0  % 94.6  %
Assembly Alexandria Alexandria, VA 2019 1990 532  437,000  96.6  % 95.7  %
Cascade at Landmark Alexandria, VA 2019 1988 277  273,000  95.7  % 93.5  %
Park Adams Arlington, VA 1969 1959 200  173,000  95.5  % 95.0  %
Bennett Park Arlington, VA 2001 2007 224  215,000  96.0  % 95.1  %
The Maxwell Arlington, VA 2011 2014 163  116,000  96.9  % 94.5  %
The Paramount Arlington, VA 2013 1984 135  141,000  98.5  % 95.6  %
The Wellington Arlington, VA 2015 1960 711  600,000  96.1  % 94.5  %
Roosevelt Towers Falls Church, VA 1965 1964 191  170,000  96.9  % 92.7  %
The Ashby at McLean McLean, VA 1996 1982 256  274,000  96.5  % 94.9  %
Assembly Dulles Herndon, VA 2019 2000 328  361,000  96.6  % 93.9  %
Assembly Herndon Herndon, VA 2019 1991 283  221,000  95.4  % 94.3  %
Assembly Manassas Manassas, VA 2019 1986 408  390,000  97.3  % 96.6  %
Assembly Leesburg Leesburg, VA 2019 1986 134  124,000  96.3  % 96.3  %
Bethesda Hill Apartments Bethesda, MD 1997 1986 195  225,000  96.9  % 96.9  %
Assembly Germantown Germantown, MD 2019 1990 218  211,000  97.7  % 97.2  %
Assembly Watkins Mill Gaithersburg, MD 2019 1975 210  193,000  96.7  % 96.2  %
3801 Connecticut Avenue Washington, D.C. 1963 1951 307  178,000  88.3  % 86.3  %
Kenmore Apartments Washington, D.C. 2008 1948 374  268,000  90.4  % 89.0  %
Yale West Washington, D.C. 2014 2011 216  173,000  96.8  % 94.0  %
Subtotal Stabilized Properties 6,658  5,804,000  95.7  % 94.3  %
Trove (2)
Arlington, VA 2015 2020 401  293,000  36.2  % 34.7  %
Subtotal All Properties 7,059  6,097,000  92.3  % 90.9  %
______________________________
(1)Leased percentage and ending occupancy calculations are based on units for multifamily buildings.
(2)This development project consists of 401 units with 374 units delivered in 2020.
25


Properties Location Year Acquired Year Constructed/Renovated Net Rentable Square Feet
Percent Leased, as of
December 31, 2020 (3)
Ending Occupancy, as of December 31, 2020 (3)
Office Buildings
515 King Street Alexandria, VA 1992 1966 75,000  81.5  % 81.5  %
Courthouse Square Alexandria, VA 2000 1979 121,000  80.8  % 80.8  %
1600 Wilson Boulevard Arlington, VA 1997 1973 171,000  86.5  % 86.5  %
Fairgate at Ballston Arlington, VA 2012 1988 144,000  87.8  % 86.3  %
Arlington Tower Arlington, VA 2018 1980/2014 390,000  92.7  % 90.1  %
Silverline Center Tysons, VA 1997 1972/2015 552,000  81.1  % 81.1  %
1901 Pennsylvania Avenue Washington, D.C. 1977 1960 101,000  86.4  % 82.0  %
1220 19th Street
Washington, D.C. 1995 1976 103,000  87.6  % 82.7  %
2000 M Street (4)
Washington, D.C. 2007 1971 233,000  82.2  % 81.6  %
1140 Connecticut Avenue Washington, D.C. 2011 1966 184,000  88.6  % 88.6  %
Army Navy Building Washington, D.C. 2014 1912/1987/2017 108,000  100.0  % 98.3  %
1775 Eye Street, NW Washington, D.C. 2014 1964 189,000  86.6  % 86.6  %
Watergate 600 Washington, D.C. 2017 1972/1997 294,000  89.2  % 89.1  %
Subtotal 2,665,000  86.6  % 85.7  %
Retail Centers
800 S. Washington Street Alexandria, VA 1998/2003 1955/1959 46,000  86.3  % 86.3  %
Concord Centre Springfield, VA 1973 1960 75,000  90.2  % 90.2  %
Randolph Shopping Center Rockville, MD 2006 1972 83,000  97.4  % 86.4  %
Montrose Shopping Center Rockville, MD 2006 1970 151,000  73.0  % 73.0  %
Takoma Park Takoma Park, MD 1963 1962 51,000  100.0  % 100.0  %
Westminster Westminster, MD 1972 1969 150,000  94.2  % 94.2  %
Chevy Chase Metro Plaza Washington, D.C. 1985 1975 49,000  83.0  % 83.0  %
Spring Valley Village Washington, D.C. 2014 1941/1950/2018 94,000  93.8  % 87.6  %
Subtotal 699,000  89.0  % 86.5  %
TOTAL 9,461,000 
______________________________
(3)    Percent leased and ending occupancy calculations are based on square feet that includes temporary lease agreements for commercial properties.
(4)    This property is subject to a ground lease which expires on October 6, 2070.

ITEM 3: LEGAL PROCEEDINGS

None.

ITEM 4: MINE SAFETY DISCLOSURES

None.
26



PART II

ITEM 5: MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market and Shareholder Information: Our shares trade on the New York Stock Exchange under the symbol WRE. As of February 11, 2021, there were 3,225 shareholders of record.

Issuer Repurchases; Unregistered Sales of Securities: A summary of our repurchases of shares of our common stock for the three months ended December 31, 2020 was as follows:
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased
October 1 - October 31, 2020 —  $ —  N/A N/A
November 1 - November 30, 2020 —  —  N/A N/A
December 1 - December 31, 2020 39,623  21.99  N/A N/A
Total 39,623  21.99  N/A N/A
______________________________
(1)    Represents restricted shares surrendered by employees to WashREIT to satisfy such employees' applicable statutory minimum tax withholding obligations in connection with the vesting of restricted shares.

Performance Graph:

The following line graph sets forth, for the period from December 31, 2015, through December 31, 2020, a comparison of the percentage change in the cumulative total stockholder return on our common stock compared to the cumulative total return of the Standard & Poor's 500 Stock Index and the MSCI US REIT Index. The graph assumes that $100 was invested on December 31, 2015, in shares of our common stock and each of the aforementioned indices and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph below.

WRE-20201231_G5.JPG
This performance graph shall not be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, or incorporated by reference into any filing by us under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

27



ITEM 6: SELECTED FINANCIAL DATA

The following table sets forth our selected financial data on a historical basis. 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.
2020 2019 2018 2017 2016
  (in thousands, except per share data)
Real estate rental revenue $ 294,118  $ 309,180  $ 291,730  $ 280,281  $ 268,672 
(Loss) income from continuing operations $ (15,680) $ 29,132  $ 1,153  $ (3,568) $ 96,261 
Discontinued operations:
Income from operations of properties sold or held for sale $ —  $ 16,158  $ 24,477  $ 23,180  $ 23,027 
Gain on sale of real estate $ —  $ 339,024  $ —  $ —  $ — 
Net (loss) income $ (15,680) $ 383,550  $ 25,630  $ 19,612  $ 119,288 
Net (loss) income attributable to the controlling interests $ (15,680) $ 383,550  $ 25,630  $ 19,668  $ 119,339 
(Loss) income from continuing operations attributable to the controlling interests per share – diluted $ (0.20) $ 0.36  $ 0.01  $ (0.05) $ 1.33 
Net (loss) income attributable to the controlling interests per share – diluted $ (0.20) $ 4.75  $ 0.32  $ 0.25  $ 1.65 
Total assets $ 2,409,818  $ 2,628,328  $ 2,417,104  $ 2,359,426  $ 2,253,619 
Amounts outstanding on line of credit $ 42,000  $ 56,000  $ 188,000  $ 166,000  $ 120,000 
Mortgage notes payable, net $ —  $ 47,074  $ 48,277  $ 81,624  $ 133,117 
Notes payable, net $ 945,370  $ 996,722  $ 995,397  $ 894,358  $ 843,084 
Shareholders’ equity $ 1,320,787  $ 1,411,726  $ 1,068,127  $ 1,094,971  $ 1,050,946 
Cash dividends declared $ 99,775  $ 96,964  $ 95,502  $ 92,834  $ 87,570 
Cash dividends declared per share $ 1.20  $ 1.20  $ 1.20  $ 1.20  $ 1.20 
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ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the discussion and analysis of our 2018 financial condition and results of operations compared to 2019, refer to Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019.

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 outlook, operating results, investment activity, financing activity and capital requirements to provide context for the remainder of MD&A.
Results of Operations. Discussion of our financial results comparing 2020 to 2019.
Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows.
Funds From Operations. Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income.
Critical Accounting Policies and Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements.

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

Net operating income (“NOI”), calculated as set forth below under the caption "Results of Operations - Net Operating Income." NOI is a non-GAAP supplemental measure to net income.
Funds From Operations (“NAREIT FFO”), calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.
Ending occupancy, calculated as occupied square footage or multifamily units as a percentage of total square footage or multifamily units, respectively, as of the last day of that period.
Leased percentage, calculated as the percentage of apartments leased for our multifamily properties and percentage of available physical net rentable area leased for our commercial properties.
Leasing activity, including new leases, renewals and expirations.

For purposes of evaluating comparative operating performance, we categorize our properties as “same-store”, “non-same-store” or discontinued operations. Same-store properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared. We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan. We consider a property's development activities to be complete when the property is ready for its intended use. The property is categorized as same-store when it has been ready for its intended use for the entirety of the years being compared. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared.

Overview

Outlook

On March 11, 2020 the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic caused state and local governments within the Washington metro region to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate and/or the types of construction projects that may continue. These actions resulted in modifications to our normal operations, including requiring our employees to work remotely with the exception of essential building personnel.

In June 2020, shelter-in-place orders began to phase out in the Washington metro region. We have developed and implemented
29


robust plans for commercial tenants returning to their leased space to reduce the risk of exposure and further spread of the virus at our properties and continue to follow the mandates of public health officials and government agencies. We continue to adhere to occupancy restrictions at our properties where required.

The effects of the COVID-19 pandemic had a significant impact on our operating results for the year ended December 31, 2020. Beginning late in the first quarter of 2020 and continuing into the second quarter of 2020, many of our retail commercial tenants were closed or were operating at significantly reduced capacity as a result of restrictions on non-essential businesses. The majority of our commercial office tenants have experienced limited disruption to their businesses due to social distancing and lockdown measures taken in response to the COVID-19 pandemic. Starting in April 2020, we began working with our commercial tenants on a case-by-case basis to the extent they demonstrated hardship as a result of the pandemic and financial ability to work through a satisfactory arrangement on a variety of relief options, generally involving negotiated deferral payment plans or early blend-and-extend renewals. By mid-June, most of our retail tenants had reopened. As of January 31, 2021, we collected 99% and 97% of office and retail cash rent during the fourth quarter of 2020, respectively, excluding the impact of contractual rent deferral agreements. The effects of COVID-19 on our commercial tenants have been reflected in an increase in credit losses of $4.5 million during 2020 compared to 2019. We have $1.0 million of deferred rent outstanding, net of repayments, from each of our office and retail segments. We continue to monitor and communicate with our commercial tenants to assess their needs and ability to pay rent.

At our multifamily properties we temporarily froze rents on full-year lease renewals, waived late fees and offered a payment deferral plan to residents who have been adversely financially impacted by COVID-19. As of January 31, 2021, we collected 99% of multifamily cash rent during the fourth quarter of 2020, excluding rent that has been deferred. Deferred rent outstanding, net of repayments, from our multifamily tenants is less than $0.1 million. The effects of COVID-19 on our multifamily tenants have been reflected in an increase in credit losses of $0.9 million during 2020 compared to 2019. We expect the economic disruptions caused by the COVID-19 pandemic to limit our ability to increase rental rates until the economic disruption of the pandemic subsides.

We had a decline in average occupancy of approximately 150 basis points during the fourth quarter of 2020 compared to the fourth quarter of 2019, excluding Trove which began lease-up in the first quarter of 2020. The effects of the COVID-19 pandemic have also impacted our ability to lease up available commercial space as physical touring stopped during shelter-in-place orders and lease decisions have been slower for prospective tenants than in previous years as they re-evaluate re-entry and space plans. New gross leasing square footage declined by 54% and 77% for office and retail space during 2020 compared 2019, respectively. The decline in new gross leasing was due to several factors, including the effects of the COVID-19 pandemic, the execution of some large tenant leases in 2019 and the sale of several office and retail properties during 2019 and 2020. As of December 31, 2020, we had approximately 430,000 square feet of vacant commercial space and approximately 276,000 square feet of commercial lease expirations scheduled for 2021. For our multifamily properties, the economic disruptions caused by the COVID-19 pandemic have limited our ability to maintain or increase rental rates. We expect this to continue until the economic disruption of the pandemic subsides. To help mitigate the impact on our operating results of the COVID-19 pandemic, we have initiated various operational cost saving initiatives across our portfolio.

We expect the COVID-19 outbreak, including any mutations thereof, will continue to affect our financial condition and results of operations going forward, including but not limited to, real estate rental revenues, credit losses and leasing activity. Given our sole concentration in the Washington metro region, our entire existing portfolio could be impacted for the foreseeable future by quarantines, shelter-in-place rules and various other restrictions imposed or re-imposed in response to a surge in COVID-19 cases. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact cannot be reasonably estimated at this time. For more information, see "Part I - Item 1A. Risk Factors" included elsewhere in this Annual Report on Form 10-K.

New legislation was enacted during 2020 to provide relief to businesses in response to the COVID-19 pandemic. We have evaluated and will    continue to evaluate the relief options available or that become available in the future, such as the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), or other emergency relief initiatives and stimulus packages instituted by the federal government. A number of the available relief options contain restrictions on future business activities, including ability to repurchase shares and pay dividends that require careful evaluation and consideration. We will continue to assess these options and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the pandemic continues to evolve. The legislation enacted in 2020 did not have a material impact on our results of operations for the year ended December 31, 2020.


30


Operating Results

Net (loss) income, NOI and NAREIT FFO for the years ended December 31, 2020 and 2019 were as follows (in thousands, except percentage amounts):
Year Ended December 31,
2020 2019 Change % Change
Net (loss) income
$ (15,680) $ 383,550  $ (399,230) (104.1) %
NOI (1)
$ 181,209  $ 193,600  $ (12,391) (6.4) %
NAREIT FFO (2)
$ 119,359  $ 134,118  $ (14,759) (11.0) %
______________________________
(1) See page 32 of the MD&A for reconciliations of NOI to net income.
(2) See page 44 of the MD&A for reconciliations of NAREIT FFO to net income.
 
The decrease in net income is primarily due to lower gains on sale of real estate ($414.0 million), lower income from discontinued operations ($16.2 million) and lower NOI ($12.4 million), partially offset by lower depreciation and amortization expense ($16.2 million), lower interest expense ($16.4 million), lower real estate impairment charges ($8.4 million) and lower general and administrative expenses ($2.1 million).

The lower NOI is primarily due to the sales of 1776 G Street ($8.5 million) and Quantico Corporate Center ($1.8 million) in 2019 and John Marshall II ($3.2 million), 1227 25th Street ($0.5 million) and Monument II ($0.4 million) in 2020, lower same-store NOI ($8.4 million) and a net operating loss from Trove ($0.3 million). These were partially offset by income from the multifamily acquisitions ($10.8 million) in 2019. The lower same-store NOI is explained in further detail beginning on page 34 (Results of Operations - 2020 Compared to 2019).

The decrease in NAREIT FFO primarily reflects lower income from discontinued operations, net of depreciation and amortization ($21.1 million) and lower NOI ($12.4 million), partially offset by lower interest expense ($16.4 million) and lower general and administrative expenses ($2.1 million).

Investment and Financing Activity

Significant investment and financing transactions during 2020 included the following:

The prepayment of the $45.6 million mortgage note secured by Yale West, which was scheduled to mature in 2052. As a result of the transaction, we recognized a gain on extinguishment of debt of $0.5 million related to the write-off of an unamortized mortgage premium of $1.4 million, partially offset by a prepayment penalty of $0.9 million.
The disposition of John Marshall II, a 223,000 square foot office property in Tysons, Virginia, for a contract sales price of $57.0 million. As a result of this transaction, we recognized a loss on sale of real estate of $6.9 million.
The prepayment of all $250.0 million of our 4.95% Senior Notes originally scheduled to mature in October 2020 without penalty using borrowings from our Revolving Credit Facility.
The execution of the one-year, $150.0 million 2020 Term Loan, maturing on May 5, 2021 with a one-year extension option. The 2020 Term Loan bears interest at LIBOR + 1.50%, which margin is subject to change based on our credit ratings, with a 0.50% floor for the LIBOR rate. We used the proceeds to repay borrowings under our Revolving Credit Facility. We subsequently prepaid the 2020 Term Loan on November 30, 2020.
The entry into a note purchase agreement to issue $350.0 million aggregate principal amount of 3.44% senior unsecured 10-year notes payable (the “Green Bonds”). The closing and full funding of the Green Bonds occurred on December 17, 2020. The proceeds of the sale of the Green Bonds were and will be used to finance or refinance recently completed and future green building and energy efficiency, sustainable water and wastewater management and renewable energy projects (“Eligible Green Projects”).
The prepayment of the $150.0 million of borrowings outstanding on the 2015 Term Loan.
In conjunction with the entry into the note purchase agreement to issue the Green Bonds, we terminated four forward interest rate swap arrangements totaling $200.0 million designated as cash flow hedges. At the time of termination, the forward swaps had a liability fair value of $20.4 million, which is amortized as interest expense over the 10-year term of the Green Bonds.
In conjunction with the prepayment of the 2015 Term Loan, we terminated interest rate swap agreements with notional amounts in the aggregate of $150.0 million. As a result of the termination, the accumulated liability fair value of the interest rate swaps of $0.6 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate
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swaps on our consolidated income statements.

As of February 11, 2021, our $700.0 million Revolving Credit Facility has an incremental borrowing capacity of $658.0 million. As of December 31, 2020, the interest rate on the facility was LIBOR plus 1.00% and LIBOR was 0.14% as of that date.

Capital Requirements

We do not have any debt maturities scheduled during 2021. We expect to have additional capital requirements as set forth on page 37 (Liquidity and Capital Resources - Capital Requirements).

Results of Operations

The discussion that follows is based on our consolidated results of operations for the three years ended December 31, 2020. 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).
Net Operating Income

NOI, defined as real estate rental revenue less real estate expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, real estate impairment and gain or loss on extinguishment of debt. We believe that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations, in either case calculated in accordance with GAAP. As such, it should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of NOI to net income follows.

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2020 Compared to 2019

The following tables reconcile NOI to net income and provide the basis for our discussion of our consolidated results of operations and NOI in 2020 compared to 2019. All amounts are in thousands except percentage amounts.
Non-Same-Store
  Same-Store
Acquisitions (1)
Development/Redevelopment (2)
Held for Sale or Sold (3)
All Properties
  2020 2019
Change

Change
2020 2019 2020 2019 2020 2019 2020 2019
Change

Change
Real estate rental revenue $ 233,904  $ 245,441  $ (11,537) (4.7) % $ 45,757  $ 27,641  $ 1,394  $ 35  $ 13,063  $ 36,063  $ 294,118  $ 309,180  $ (15,062) (4.9) %
Real estate expenses
87,013  90,130  (3,117) (3.5) % 18,564  11,242  1,735  76  5,597  14,132  112,909  115,580  (2,671) (2.3) %
NOI $ 146,891  $ 155,311  $ (8,420) (5.4) % $ 27,193  $ 16,399  $ (341) $ (41) $ 7,466  $ 21,931  $ 181,209  $ 193,600  $ (12,391) (6.4) %
Reconciliation to net income:
Depreciation and amortization (120,030) (136,253) 16,223  (11.9) %
General and administrative expenses (23,951) (26,068) 2,117  (8.1) %
Real estate impairment —  (8,374) 8,374  (100.0) %
(Loss) gain on sale of real estate (15,009) 59,961  (74,970) (125.0) %
Interest expense (37,305) (53,734) 16,429  (30.6) %
Loss on interest rate derivatives (560) —  (560) 100.0  %
Loss on extinguishment of debt (34) —  (34) 100.0  %
Discontinued operations (4):
Income from properties sold or held for sale —  16,158  (16,158) (100.0) %
Gain on sale of real estate —  339,024  (339,024) (100.0) %
Loss on extinguishment of debt —  (764) 764  (100.0) %
Net (loss) income $ (15,680) $ 383,550  $ (399,230) (104.1) %
______________________________ 
(1)Acquisitions:
2019 Multifamily – Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg, Assembly Herndon, Assembly Germantown and Assembly Watkins Mill (collectively, the “Assembly Portfolio”) and Cascade at Landmark

(2)Development/redevelopment properties:
Multifamily development property – Trove and land adjacent to Riverside Apartments

(3)Sold (classified as continuing operations):
2020 Office – John Marshall II, Monument II and 1227 25th Street
2019 Office – Quantico Corporate Center and 1776 G Street

(4)     Discontinued operations:
    2019 Retail – Wheaton Park, Bradlee Shopping Center, Shoppes of Foxchase, Gateway Overlook, Olney Village Center, Frederick County Square, Centre at Hagerstown and Frederick Crossing
    
Real Estate Rental Revenue

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

Real estate rental revenue from same-store properties for the two years ended December 31, 2020 was as follows (in thousands, except percentage amounts):
  Year Ended December 31,
  2020 2019 $ Change % Change
Multifamily
$ 97,894  $ 98,455  $ (561) (0.6) %
Office 119,264  127,996  (8,732) (6.8) %
Other
16,746  18,990  (2,244) (11.8) %
Total same-store real estate rental revenue $ 233,904  $ 245,441  $ (11,537) (4.7) %

Multifamily: Decrease primarily due to higher rent abatements ($0.5 million), lower move-in charges ($0.5 million) and higher credit losses ($0.4 million) related to the COVID-19 pandemic. These were partially offset by higher termination
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fees ($0.3 million), rental rates ($0.2 million) and parking income ($0.1 million).
Office: Decrease primarily due to lower lease termination fees ($3.7 million), lower parking income ($2.2 million), higher credit losses ($2.1 million) and lower reimbursements ($0.8 million). The lower parking income and higher credit losses are primarily due to the COVID-19 pandemic.

Real estate rental revenue from acquisitions increased due to the completion of a full year of operations at the Assembly Portfolio ($14.6 million) and Cascade at Landmark ($3.6 million) which were acquired in 2019.

Real estate rental revenue from sold properties classified as continuing operations decreased due to the sale of 1776 G Street ($13.7 million) during the fourth quarter of 2019, John Marshall II ($5.3 million) during the second quarter of 2020, Quantico Corporate Center ($2.8 million) during the second quarter of 2019, and 1227 25th Street ($0.6 million) and Monument II ($0.6 million) during the fourth quarter of 2020.

Ending occupancy for properties classified as continuing operations for the two years ended December 31, 2020 was as follows:
December 31, 2020 December 31, 2019 Decrease
Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total
Multifamily (1)
93.7  % 86.7  % 90.9  % 95.0  % 94.7  % 94.9  % (1.3) % (8.0) % (4.0) %
Office 85.7  % N/A 85.7  % 88.4  % 94.9  % 89.6  % (2.7) % N/A (3.9) %
Other 86.5  % N/A 86.5  % 90.9  % N/A 90.9  % (4.4) % N/A (4.4) %
Total (1)
90.1  % 86.7  % 89.7  % 92.0  % 94.7  % 92.8  % (1.9) % (8.0) % (3.1) %

(1) Ending occupancy includes the addition of the total rentable units at Trove, which began to lease-up in the first quarter of 2020. Excluding Trove, total multifamily ending occupancy was 94.3% and total portfolio ending occupancy was 91.4% as of December 31, 2020.

Multifamily: Decrease in same-store ending occupancy was primarily due to lower ending occupancy at 3801 Connecticut Avenue, The Kenmore, Yale West and The Maxwell, partially offset by higher ending occupancy at Bethesda Hill Apartments.
Office: Decrease in same-store ending occupancy was primarily due to lower ending occupancy at Silverline Center, 2000 M Street, and 1775 Eye Street, partially offset by higher ending occupancy at 1220 19th Street, Fairgate at Ballston and Watergate 600.

During the year ended December 31, 2020, we executed new and renewed leases in our office segment as follows:
Square Feet
(in thousands)
Average Rental Rate
(per square foot)
% Rental Rate Increase
Leasing Costs (1)
(per square foot)
Free Rent (weighted average months)
Office 214  $ 47.37  14.4  % $ 32.34  4.4 
______________________________
(1)    Consist of tenant improvements and leasing commissions.

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Real Estate Expenses

Real estate expenses as a percentage of revenue for the two years ended December 31, 2020 were 38.4% and 37.4%, respectively.

Real estate expenses from same-store properties for the two years ended December 31, 2020 were as follows (in thousands, except percentage amounts):
  Year Ended December 31,
  2020 2019 $ Change % Change
Multifamily
$ 37,816  $ 37,817  $ (1) —  %
Office 43,855  46,791  (2,936) (6.3) %
Other
5,342  5,522  (180) (3.3) %
Total same-store real estate expenses $ 87,013  $ 90,130  $ (3,117) (3.5) %

Multifamily: Higher real estate tax ($0.5 million) and insurance ($0.2 million) expenses were offset by lower utilities ($0.3 million), repairs and maintenance ($0.2 million) and administrative ($0.2 million) expenses.
Office: Decrease primarily due to lower utilities ($1.7 million), contract maintenance ($1.0 million) and administrative ($0.8 million) expenses, partially offset by higher real estate tax ($0.3 million) and insurance ($0.2 million) expenses.

Other Income and Expenses

Depreciation and Amortization: Decrease primarily due to the higher amortization of intangible lease assets at the Assembly Portfolio ($6.6 million) and Cascade at Landmark ($0.3 million) in 2019, lower depreciation and amortization at same-store properties ($5.7 million) and the dispositions of 1776 G Street ($2.7 million) and Quantico Corporate Center ($0.8 million) in 2019 and John Marshall II ($2.8 million) and Monument II ($0.4 million) in 2020. These decreases were partially offset by placing the Trove development ($3.1 million) into service during 2020.

General and administrative expenses: Decrease primarily due to lower short term incentive compensation ($2.0 million) and severance ($1.1 million) expenses in 2020, partially offset by the reversal of a transfer tax liability in 2019 ($0.7 million).

Real estate impairment: The real estate impairment charge of $8.4 million during the first quarter of 2019 reduced the carrying value of Quantico Corporate Center to its estimated fair value (see note 3 to the consolidated financial statements).

Loss on sale of real estate: The loss during 2020 is primarily due to losses on the sales of John Marshall II ($6.9 million) and Monument II ($8.6 million), partially offset by a gain on the sale of 1227 25th Street ($1.1 million). The gain during 2019 is due to the sale of 1776 G Street ($61.0 million), partially offset by a loss on the sale of Quantico Corporate Center ($1.0 million).

Loss on extinguishment of debt: During the fourth quarter of 2020, we recognized a loss on extinguishment of debt of $0.3 million related to the prepayments of the $150.0 million 2020 Term Loan originally scheduled to mature in May 2021 and the $150.0 million 2015 Term Loan originally scheduled to mature in March 2021. During the second quarter of 2020, we recognized a loss of $0.2 million related to the prepayment of all $250.0 million of our 4.95% Senior Notes originally scheduled to mature in October 2020. These losses were partially offset by a gain of $0.5 million on the prepayment of the mortgage note secured by Yale West Apartments during the first quarter of 2020.

Loss on interest rate derivatives: In December 2020, in connection with the prepayment of our 2015 Term Loan, we terminated interest rate swap agreements with notional amounts in the aggregate of $150.0 million. As a result of the termination, the accumulated fair value of the interest rate swaps of $0.6 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our consolidated income statements.


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Interest Expense: Interest expense by debt type for the two years ended December 31, 2020 was as follows (in thousands, except percentage amounts):
Year Ended December 31,
Debt Type 2020 2019 $ Change % Change
Notes payable $ 33,569  $ 45,595  $ (12,026) (26.4) %
Mortgage notes payable 172  2,074  (1,902) (91.7) %
Line of credit 5,783  9,279  (3,496) (37.7) %
Capitalized interest (2,219) (3,214) 995  31.0  %
Total $ 37,305  $ 53,734  $ (16,429) (30.6) %

Notes payable: Decrease primarily due to prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020 and the execution of a six-month $450.0 million 2019 Term Loan in April 2019 to fund the Assembly Portfolio acquisition that was repaid in the third quarter of 2019, partially offset by the new $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020, and the issuance of the $350.0 million Green Bonds in December 2020.
Mortgage notes payable: Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.
Line of credit: Decrease primarily due to a lower weighted average interest rate of 1.5% during 2020, as compared to 3.3% during 2019, partially offset by higher weighted average borrowings of $204.8 million during 2020, as compared to $196.1 million during 2019.
Capitalized interest: Decrease primarily due to placing into service assets at Trove.

Discontinued operations:

Income from properties sold or held for sale: Decrease primarily due to the sale of the properties classified as discontinued operations during 2019.

Gain on sale of real estate: Decrease due to gains on the sales of the Shopping Center Portfolio ($333.0 million) and Frederick Crossing and Frederick County Square ($9.5 million), partially offset by a loss on the sale of Centre at Hagerstown ($3.5 million) during 2019.

Loss on extinguishment of debt: We recognized a $0.8 million loss on extinguishment of debt during 2019 related to the prepayment of the mortgage note secured by Olney Village Center prior to that property’s disposition as part of the Shopping Center Portfolio.



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Liquidity and Capital Resources

As the local and global economies have weakened as a result of COVID-19, ensuring adequate liquidity is critical. We believe we have access to adequate resources to meet the needs of our existing operations, mandatory capital expenditures, dividend payments and working capital, to the extent not funded by cash provided by operating activities. However, we expect the COVID-19 pandemic to continue to adversely impact our future operating cash flows. Such adverse impacts include the inability of some of our tenants to pay their rent on time or at all, longer lease-up periods for both anticipated and unanticipated vacancies, temporary rental rate freezes and contractual rent deferral arrangements.

In April 2020, we prepaid without penalty all $250.0 million of our 4.95% Senior Notes due 2020 using borrowings on our Revolving Credit Facility.

In April 2020, we executed an amendment to the John Marshall II purchase and sale agreement, decreasing the contract sale price to $57.0 million, and closed on the sale on April 21, 2020.

In May 2020, the Company closed on a one-year unsecured term loan, with a one-year extension option, in a principal amount of $150.0 million. We used the proceeds to repay borrowings under our Revolving Credit Facility. The term loan was subsequently repaid in full on November 30, 2020.

In September 2020, we entered into a note purchase agreement to issue $350.0 million aggregate principal amount of 3.44% senior unsecured 10-year notes payable. The closing and full funding of the Green Bonds occurred on December 17, 2020.

In the fourth quarter of 2020, we repaid $300.0 million of existing term loans (including the $150.0 million term loan incurred in May 2020) maturing in 2021 and 2022. We have no debt maturing until the fourth quarter of 2022.

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 incurrence of debt and issuance of equity securities is dependent on, among other things, general economic conditions including the impacts of the COVID-19 pandemic, general market conditions for REITs, our operating performance, our debt rating, the current trading price of our common shares and other capital market conditions. We analyze which source of capital we believe to be most advantageous to us at any particular point in time.

As of February 11, 2021, we had cash and cash equivalents of approximately $25.5 million and availability under our Revolving Credit Facility of $638.0 million. We currently expect that our potential sources of liquidity for acquisitions, development, redevelopment, expansion and renovation of properties, and operating and administrative expenses, may include:

Cash flow from operations;
Borrowings under our Revolving Credit Facility or other new short-term facilities;
Issuances of our equity securities and/or common units in operating partnerships;
Issuances of preferred shares;
Proceeds from long-term secured or unsecured debt financings, including construction loans and term loans, or the issuance of debt securities;
Investment from joint venture partners; and
Net proceeds from the sale of assets.

In response to the COVID-19 pandemic, we significantly reduced our capital requirements as compared to the estimates we disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. We reduced our expected 2020 capital expenditures by approximately $40 million by deferring non-essential building restorations, not incurring certain tenant improvements and leasing costs for speculative leasing, decreasing multifamily renovation capital expenditures, and lowering our anticipated development spending as we did not break ground on the new Riverside development this year.

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During 2021, we expect that we will have significant capital requirements, which will continue to be impacted by the COVID-19 pandemic, including the following items:

Funding dividends and distributions to our shareholders (which we intend to continue to pay at or about current levels);
Approximately $45.0 - $50.0 million to invest in our existing portfolio of operating assets, including approximately $10.0 - $15.0 million to fund tenant-related capital requirements and leasing commissions;
Approximately $5.0 - $7.5 million to invest in our development and redevelopment projects; and
Funding for potential property acquisitions throughout 2021, offset by proceeds from potential property dispositions.

There can be no assurance that our capital requirements will not be materially higher or lower than the above expectations. We currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements in 2021. However, as a result of the uncertainty of the future impacts of the COVID-19 pandemic, general market conditions in the greater Washington metro region, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated 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.

Debt Financing

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

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As of December 31, 2020, our future debt principal payments are scheduled as follows (in thousands):

WRE-20201231_G6.JPG
Year Unsecured Notes Payable/Term Loans Revolving Credit Facility Total Debt Average Interest Rate
2021 $ —  $ —  $ —  —  %
2022 300,000  —  300,000  4.0  %
2023 250,000  (1) 42,000  (2) 292,000  2.6  %
2024 —  —  —  —  %
2025 —  —  —  —  %
Thereafter 400,000  (3) —  400,000  4.5  %
Scheduled principal payments 950,000  42,000  992,000  3.8  %
Premiums and discounts, net (456) —  (456)
Debt issuance costs, net (4,174) —  (4,174)
Total $ 945,370  $ 42,000  $ 987,370  3.8  %
______________________________
(1)WashREIT entered into interest rate swaps to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed interest rate for $150.0 million portion of the term loan. For the remaining $100.0 million portion of the term loan, WashREIT entered into interest rate swaps to effectively fix a LIBOR plus 100 basis points floating interest rate to a 3.71% all-in fixed interest rate. The interest rates are fixed through the term loan maturity of July 2023. The 2018 Term Loan has an all-in fixed interest rate of 2.87%.
(2)Maturity date for credit facility of March 2023 assumes election of option for two additional 6-month periods.
(3)The closing and full funding of the $350.0 million 10-year 3.44% Green Bonds occurred on December 17, 2020. The Green Bonds have an all-in fixed interest rate of 4.09%.

The weighted average maturity for our debt is 5.2 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations.

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

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Debt Covenants

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

Failure to comply with any of the covenants under our Revolving Credit Facility, 2018 Term Loan, unsecured notes or other debt instruments could result in a default under one or more of our debt instruments. This could cause our lenders to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and liquidity. In addition, our ability to draw on our Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants.
As of December 31, 2020, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan and unsecured notes.

Common Equity

We have authorized for issuance 100.0 million common shares, of which approximately 84.4 million shares were outstanding at December 31, 2020.

On May 4, 2018, we entered into eight separate equity distribution agreements (collectively, the “2018 Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.) relating to the issuance of up to $250.0 million of our common shares from time to time. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt.

Our issuances and net proceeds on the 2018 Equity Distribution Agreements for the three years ended December 31, 2020 were as follows (in thousands, except per share data):
Year Ended December 31,
2020 2019 2018
Issuance of common shares 2,000  1,859  1,165 
Weighted average price per share $ 23.86  $ 30.00  $ 31.18 
Net proceeds $ 48,355  $ 54,916  $ 35,472 

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

Our issuances and net proceeds on the dividend reinvestment program for the three years ended December 31, 2020 were as follows (in thousands; except per share data):
Year Ended December 31,
2020 2019 2018
Issuance of common shares 89  173  81 
Weighted average price per share $ 24.12  $ 27.58  $ 29.18 
Net proceeds $ 2,121  $ 4,755  $ 1,973 

Preferred Equity

Our board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of December 31, 2020, no preferred shares are issued and outstanding.

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Capital Commitments

We will require capital for development and redevelopment projects currently underway and in the future. We are currently engaged in development activities for the ground-up development of a multifamily property (Trove) on land adjacent to The Wellington and predevelopment activities for the ground-up development of a multifamily property on land adjacent to Riverside Apartments. As of December 31, 2020, we had no outstanding contractual commitments related to our development and redevelopment projects, and expect to fund approximately $5.0 - $7.5 million of total development and redevelopment spending during 2021.

In addition to our development and redevelopment projects, we anticipate funding several major renovation projects in our portfolios during 2021, as follows (in thousands):
Multifamily $ 15,500 
Office 4,000 
Other 100 
Total $ 19,600 

These projects include unit, common area, lobby and pool deck renovations, elevator modernizations, mechanical upgrades, facade restorations and roof replacements at multifamily properties; HVAC replacements, common area renovations and new conference space buildout at office properties; and garage repairs at retail properties. Not all of the anticipated spending had been committed via executed construction contracts at December 31, 2020. We expect to fund these projects using cash generated by our real estate operations, through borrowings on our Revolving Credit Facility, or raising additional debt or equity capital in the public market.

Contractual Obligations

As of December 31, 2020, certain contractual obligations will require significant capital as follows (in thousands):
  Payments due by Period
  Total Less than 1
year
1-3 years 4-5 years After 5
years
Long-term debt(1)
$ 1,208,527  $ 38,618  $ 671,139  $ 35,990  $ 462,780 
Purchase obligations(2)
8,332  3,669  4,663  —  — 
Tenant-related capital(3)
3,592  2,101  1,491  —  — 
Building capital(4)
2,061  2,061  —  —  — 
Operating leases 13,480  285  780  520  11,895 
______________________________
(1)See notes 5, 6 and 7 of the consolidated financial statements. Amounts include principal, interest and facility fees.
(2)Represents electricity and gas purchase agreements with terms through 2024.
(3)Committed tenant-related capital based on executed leases as of December 31, 2020.
(4)Committed building capital additions based on contracts in place as of December 31, 2020.

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 agreements and our electricity and 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 $10.0 - $15.0 million in 2021.


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Historical Cash Flows

Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from operations were to decline significantly, we may have to reduce our dividend. Consolidated cash flows for the three years ended December 31, 2020 were as follows (in thousands):
  Year ended December 31, Variance
  2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Cash provided by operating activities $ 112,991  $ 130,923  $ 147,369  $ (17,932) $ (16,446)
Cash provided by (used in) investing activities 65,760  61,036  (38,942) 4,724  99,978 
Cash used in financing activities (185,199) (184,848) (113,410) (351) (71,438)

Net cash provided by operating activities decreased in 2020 as compared to 2019 primarily due to the sales of the Retail Portfolio and 1776 G Street during 2019 and John Marshall II in 2020 (see note 3 to the consolidated financial statements). Net cash provided by operating activities decreased in 2019 as compared to 2018 primarily due to the sales of the Retail Portfolio during 2019 (see note 3 to the consolidated financial statements) and 2445 M Street in 2018, partially offset by the acquisition of the Assembly Portfolio and Cascade at Landmark during 2019.

Net cash provided by investing activities increased in 2020 as compared to 2019 primarily due to lower development expenditures during 2020. Net cash provided by investing activities increased in 2019 as compared to 2018 primarily due to a higher volume of disposition activity during 2019, partially offset by a higher volume of acquisition activity and higher development expenditures during 2019.

Net cash used in financing activities increased in 2020 as compared to 2019 primarily due to higher repayments of notes payable and term loans, the repayment of the mortgage note and the settlement of interest rate swaps (see note 8 to the consolidated financial statements), partially offset by lower net repayments on the Revolving Credit Facility. Net cash used in financing activities increased in 2019 as compared to 2018 primarily due to higher net repayments on the Revolving Credit Facility, partially offset by lower mortgage note repayments and higher proceeds from equity issuances.

Capital Improvements and Development Costs

Our capital improvement, development and redevelopment costs for the three years ended December 31, 2020 were as follows (in thousands):
  Year Ended December 31,
  2020 2019 2018
Accretive capital improvements and development costs:
Acquisition related $ 10,487  $ 9,158  $ 13,489 
Expansions and major renovations 16,561  25,008  26,045 
Development/redevelopment 28,812  47,492  34,806 
Tenant improvements (including first generation leases) 21,785  28,565  24,914 
Total accretive capital improvements (1)
77,645  110,223  99,254 
Other capital improvements: 9,262  5,725  6,622 
Total $ 86,907  $ 115,948  $ 105,876 
______________________________
(1)     We consider these capital improvements to be accretive to revenue and not necessarily to net income.

Included in the capital improvement and development costs listed above are capitalized interest in the amount of $2.2 million, $3.2 million and $2.1 million for the three years ended December 31, 2020, respectively, and capitalized employee compensation in the amount of $2.0 million, $1.2 million and $2.7 million for the three years ended December 31, 2020, respectively.


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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 2020 to the Assembly Portfolio and Cascade at Landmark.

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 2020 included common area, lobby, unit and facade renovations at Riverside Apartments; retail space renovations at 1775 Eye Street; heating system replacement, roof replacement and unit renovations at The Kenmore; heating system replacement and elevator modernization at The Ashby and roof replacement and unit renovations at 3801 Connecticut Avenue.

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 than would be otherwise achievable. Development/redevelopment costs in 2020 primarily include development costs for Trove, a multifamily development adjacent to The Wellington and predevelopment costs for a future multifamily development adjacent to Riverside Apartments.

Tenant Improvements: Tenant improvements are costs, such as space build-outs, associated with commercial lease transactions. Our average tenant improvement costs per square foot of space leased during the three years ended December 31, 2020 were as follows:
  Year Ended December 31,
2020 2019 2018
Office $ 23.03  $ 69.99  $ 33.51 

The $46.96 decrease in 2020 and the $36.48 increase in 2019 in tenant improvement costs per square foot of office space leased was primarily due to new leases at Watergate 600 and Monument II executed in 2019.

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 multifamily properties, this category includes improvements made as needed upon vacancy of an apartment. Such improvements totaled $3.6 million in 2020, averaging approximately $1,284 per apartment for the 42% of apartments which turned over relative to our total portfolio of apartment units. In our commercial properties and multifamily properties (aside from improvements related to apartment turnover), improvements include facade repairs, 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 $5.9 million during 2020 to maintain the quality of our buildings.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements as of December 31, 2020 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


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Forward-Looking Statements

Some of the statements contained in this Form 10-K constitute forward-looking statements within the meaning of federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional factors include, but are not limited to:

(a)the ultimate duration of the COVID-19 global pandemic, including any mutations thereof, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, the speed of the vaccine rollout, the effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and efficacy of the vaccines against emerging variants of COVID-19;
(b)the risks associated with ownership of real estate in general and our real estate assets in particular;
(c)the economic health of the greater Washington metro region;
(d)the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated;
(e)changes in the composition of our portfolio;
(f)fluctuations in interest rates;
(g)reductions in or actual or threatened changes to the timing of federal government spending;
(h)the risks related to use of third-party providers;
(i)the economic health of our tenants;
(j)shifts away from brick and mortar stores to e-commerce;
(k)the availability and terms of financing and capital and the general volatility of securities markets;
(l)compliance with applicable laws, including those concerning the environment and access by persons with disabilities;
(m)the risks related to not having adequate insurance to cover potential losses;
(n)the risks related to our organizational structure and limitations of stock ownership;
(o)changes in the market value of securities;
(p)terrorist attacks or actions and/or cyber-attacks;
(q)failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and
(r)other factors discussed under the caption “Risk Factors.”

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “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

NAREIT FFO is a widely used measure of operating performance for real estate companies. In its 2018 NAREIT FFO White Paper Restatement, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) defines NAREIT FFO as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties; impairments of depreciable real estate, and real estate depreciation and amortization. We consider NAREIT FFO to be a standard supplemental measure for REITs, and believe it is a useful metric because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time. Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently.


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The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net income for the three years ended December 31, 2020 (in thousands):
Year Ended December 31,
2020 2019 2018
Net (loss) income $ (15,680) $ 383,550  $ 25,630 
Adjustments:
Depreciation and amortization 120,030  136,253  111,826 
Real estate impairment —  8,374  1,886 
Loss (gain) on sale of depreciable real estate 15,009  (59,961) (2,495)
Discontinued operations:
Depreciation and amortization —  4,926  9,402 
Gain on sale of depreciable real estate —  (339,024) — 
NAREIT FFO $ 119,359  $ 134,118  $ 146,249 

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 circumstances, the results of which form the basis for making judgments about the carrying 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.

Accounting for Real Estate Acquisitions

We record acquired assets, including physical assets and in-place leases, and assumed 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-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, 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 interest 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 amortization 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 remaining term of the underlying leases. If any of the fair value of below market lease intangibles
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includes fair value associated with a renewal option, such amounts are not amortized until the renewal option is executed. If the renewal option is not executed, the related value is expensed at that time. Should a tenant terminate its lease prior to the expiration date, 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.

Credit Losses on Lease Related Receivables

Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. When collectability is determined not probable, any lease income recognized subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected.

Real Estate Impairment

We recognize impairment losses on long-lived assets used in operations, development 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. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual and residual cash flows and our estimated holding period for each property. Such assumptions involve a high degree of judgment and could be affected by future economic and market conditions. When determining if a property has indicators of impairment, we evaluate the property's occupancy, our expected holding period for the property, strategic decisions regarding the property's future operations or development and other market factors. If such carrying amount is in excess of the estimated undiscounted 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 its estimated fair value, calculated in accordance with current GAAP fair value provisions. Assets held for sale are recorded at the lower of cost or fair value less costs to sell.

U.S. 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 taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate U.S. federal and state income tax on their taxable income at regular statutory rates, or as calculated under the alternative minimum tax, as appropriate. As of both December 31, 2020 and 2019, our TRSs had a deferred tax asset of $1.4 million that was fully reserved. As of December 31, 2019, we had deferred state and local tax liabilities of $0.6 million. These deferred tax liabilities were primarily related to temporary differences in the timing of the recognition of revenue, amortization and depreciation. We did not have deferred state or local tax liabilities as of December 31, 2020.
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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 line of credit. We primarily enter into debt obligations to support general corporate purposes, including acquisition of real estate properties, capital improvements and working capital needs. We use interest rate swap arrangements to reduce our exposure to the variability in future cash flows attributable to changes in interest rates.

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, 2020.
2021 2022 2023 2024 2025 Thereafter Total Fair Value
(dollars in thousands)
Unsecured fixed rate debt (1)
Principal $ —  $ 300,000  $ 250,000  $ —  $ —  $ 400,000  $ 950,000  $ 978,678 
Interest payments $ 37,218  $ 37,218  $ 22,177  $ 17,995  $ 17,995  $ 80,775  $ 213,378 
Interest rate on debt maturities —  % 4.0  % 2.6  % —  % —  % 4.5  % 3.8  %
Unsecured variable rate debt
Principal $ —  $ —  $ 42,000  $ —  $ —  $ —  $ 42,000  $ 42,000 
Variable interest rate on debt maturities 1.1  % 1.1  %
______________________________ 
(1)    Includes $250.0 million term loan with a floating interest rate. The interest rate on the $250.0 million term loan is effectively fixed by interest rate swap arrangements at 2.9%.

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

The following table sets forth information pertaining to interest rate swap contracts in place as of December 31, 2020 and 2019 and their respective fair values (dollars in thousands):
Notional Amount Floating Index Rate