XNYS:WRE Washington REIT Quarterly Report 10-Q Filing - 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
 ___________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-6622
 WASHINGTON REAL ESTATE
INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND
 
53-0261100
(State of incorporation)
 
(IRS Employer Identification Number)
6110 EXECUTIVE BOULEVARD, SUITE 800, ROCKVILLE, MARYLAND 20852
(Address of principal executive office) (Zip code)
Registrant’s telephone number, including area code: (301) 984-9400
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of exchange on which registered
Shares of Beneficial Interest
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 ___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days.    YES x   NO  o
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x      NO  o
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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  o    NO  x  
As of August 3, 2012, 66,321,492 common shares were outstanding.
 



WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2


PART I
FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Comprehensive Income, Consolidated Statements of Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2011 included in WRIT’s 2011 Annual Report on Form 10-K.

3


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
Land
$
489,950

 
$
472,196

Income producing property
1,988,331

 
1,934,587

 
2,478,281

 
2,406,783

Accumulated depreciation and amortization
(577,882
)
 
(535,732
)
Net income producing property
1,900,399

 
1,871,051

Held for development
45,928

 
43,089

Total real estate held for investment, net
1,946,327

 
1,914,140

Cash and cash equivalents
14,367

 
12,765

Restricted cash
19,853

 
19,424

Rents and other receivables, net of allowance for doubtful accounts of $10,416 and $8,921, respectively
57,493

 
53,828

Prepaid expenses and other assets
115,631

 
120,601

Total assets
$
2,153,671

 
$
2,120,758

Liabilities
 
 
 
Notes payable
$
607,653

 
$
657,470

Mortgage notes payable
425,268

 
427,710

Lines of credit
221,000

 
99,000

Accounts payable and other liabilities
54,413

 
51,145

Advance rents
15,295

 
13,739

Tenant security deposits
9,827

 
8,862

Total liabilities
1,333,456

 
1,257,926

Equity
 
 
 
Shareholders’ equity
 
 
 
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued and outstanding

 

Shares of beneficial interest; $0.01 par value; 100,000 shares authorized: 66,323 and 66,265 shares issued and 66,321 and 66,265 shares outstanding at June 30, 2012 and December 31, 2011, respectively
662

 
662

Additional paid in capital
1,142,391

 
1,138,478

Distributions in excess of net income
(326,714
)
 
(280,096
)
Total shareholders’ equity
816,339

 
859,044

Noncontrolling interests in subsidiaries
3,876

 
3,788

Total equity
820,215

 
862,832

Total liabilities and equity
$
2,153,671

 
$
2,120,758

 

See accompanying notes to the financial statements.

4


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenue
 
 
 
 
 
 
 
Real estate rental revenue
$
76,777

 
$
71,684

 
$
153,276

 
$
140,888

Expenses
 
 
 
 
 
 
 
Real estate expenses
25,479

 
23,801

 
51,492

 
47,052

Depreciation and amortization
25,591

 
22,526

 
51,585

 
44,422

Acquisition costs
254

 
322

 
308

 
1,971

General and administrative
4,164

 
4,049

 
7,770

 
7,751

 
55,488

 
50,698

 
111,155

 
101,196

Real estate operating income
21,289

 
20,986

 
42,121

 
39,692

Other income (expense)
 
 
 
 
 
 
 
Interest expense
(15,533
)
 
(16,865
)
 
(31,428
)
 
(33,758
)
Other income
252

 
310

 
496

 
616

 
(15,281
)
 
(16,555
)
 
(30,932
)
 
(33,142
)
Income from continuing operations
6,008

 
4,431

 
11,189

 
6,550

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

 
3,298

 

 
5,867

Income tax expense

 
(1,173
)
 

 
(1,173
)
Net income
6,008

 
6,556

 
11,189

 
11,244

Less: Net income attributable to noncontrolling interests in subsidiaries

 
(34
)
 

 
(57
)
Net income attributable to the controlling interests
$
6,008

 
$
6,522

 
$
11,189

 
$
11,187

Basic net income (loss) attributable to the controlling interests per share:
 
 
 
 
 
 
 
Continuing operations
$
0.09

 
$
0.07

 
$
0.16

 
$
0.10

Discontinued operations

 
0.03

 

 
0.07

Net income attributable to the controlling interests per share
$
0.09

 
$
0.10

 
$
0.16

 
$
0.17

Diluted net income (loss) attributable to the controlling interests per share:
 
 
 
 
 
 
 
Continuing operations
$
0.09

 
$
0.07

 
$
0.16

 
$
0.10

Discontinued operations

 
0.03

 

 
0.07

Net income attributable to the controlling interests per share
$
0.09

 
$
0.10

 
$
0.16

 
$
0.17

Weighted average shares outstanding – basic
66,241

 
65,954

 
66,218

 
65,920

Weighted average shares outstanding – diluted
66,380

 
65,989

 
66,354

 
65,948

Dividends declared per share
$
0.4338

 
$
0.4338

 
$
0.8676

 
$
0.8676


See accompanying notes to the financial statements.

5



WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
6,008

 
$
6,556

 
$
11,189

 
$
11,244

Other comprehensive income:
 
 
 
 
 
 
 
Change in fair value of interest rate hedge

 
421

 

 
833

Comprehensive income
6,008

 
6,977

 
11,189

 
12,077

Less: Net income attributable to noncontrolling interests

 
(34
)
 

 
(57
)
Comprehensive income attributable to the controlling interests
$
6,008

 
$
6,943

 
$
11,189

 
$
12,020


See accompanying notes to the financial statements.


6


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS)
(UNAUDITED)
 
 
Shares Outstanding
 
Shares of Beneficial Interest at Par Value
 
Additional Paid in Capital
 
Distributions in Excess of Net Income Attributable to the Controlling Interests
 
Total Shareholders’ Equity
 
Noncontrolling Interests in Subsidiaries
 
Total Equity
Balance, December 31, 2011
66,265

 
$
662

 
$
1,138,478

 
$
(280,096
)
 
$
859,044

 
$
3,788

 
$
862,832

Net income attributable to the controlling interests

 

 

 
11,189

 
11,189

 

 
11,189

Distributions to noncontrolling interests

 

 

 

 

 
(14
)
 
(14
)
Contributions from noncontrolling interest

 

 

 

 

 
102

 
102

Dividends

 

 

 
(57,807
)
 
(57,807
)
 

 
(57,807
)
Shares issued under Dividend Reinvestment Program
55

 

 
1,345

 

 
1,345

 

 
1,345

Share options exercised
1

 

 
23

 

 
23

 

 
23

Share grants, net of share grant amortization and forfeitures

 

 
2,545

 

 
2,545

 

 
2,545

Balance, June 30, 2012
66,321

 
$
662

 
$
1,142,391

 
$
(326,714
)
 
$
816,339

 
$
3,876

 
$
820,215


See accompanying notes to the financial statements.

7


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
 
Six Months Ended June 30,
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net income
$
11,189

 
$
11,244

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, including amounts in discontinued operations
51,585

 
50,708

Provision for losses on accounts receivable
2,013

 
2,138

Real estate impairment

 
599

Amortization of share grants, net
2,763

 
2,745

Amortization of debt premiums, discounts and related financing costs
1,885

 
1,616

Changes in operating other assets
(4,609
)
 
(12,840
)
Changes in operating other liabilities
2,294

 
3,764

Net cash provided by operating activities
67,120

 
59,974

Cash flows from investing activities
 
 
 
Real estate acquisitions, net
(52,142
)
 
(126,870
)
Net cash received for sale of real estate

 
58,117

Capital improvements to real estate
(21,525
)
 
(10,399
)
Development in progress
(2,218
)
 
(11,802
)
Non-real estate capital improvements
(415
)
 
(231
)
Net cash used in investing activities
(76,300
)
 
(91,185
)
Cash flows from financing activities
 
 
 
Line of credit borrowings, net
122,000

 
145,000

Dividends paid
(57,807
)
 
(57,386
)
Net contributions from (distributions to) noncontrolling interests
88

 
(107
)
Financing costs
(1,967
)
 

Proceeds from dividend reinvestment program
1,345

 
2,644

Principal payments – mortgage notes payable
(2,900
)
 
(2,047
)
Notes payable repayments
(50,000
)
 
(93,862
)
Net proceeds from exercise of share options
23

 
1,088

Net cash provided by and (used in) financing activities
10,782

 
(4,670
)
Net increase (decrease) in cash and cash equivalents
1,602

 
(35,881
)
Cash and cash equivalents at beginning of year
12,765

 
78,767

Cash and cash equivalents at end of period
$
14,367

 
$
42,886

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
29,995

 
$
32,941


See accompanying notes to the financial statements.

8


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS
Washington Real Estate Investment Trust (“We” or “WRIT”), a Maryland real estate investment trust, is a self-administered, self-managed equity real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and development of income-producing real estate properties in the greater Washington metro region. We own a diversified portfolio of office buildings, medical office buildings, multifamily buildings and retail centers.
Federal Income Taxes
We believe that we qualify as a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code and intend to continue to qualify as such. To maintain our status as a REIT, we are required to distribute 90% of our ordinary taxable income to our shareholders. When selling properties, we have the option of (a) reinvesting the sales proceeds of properties sold, allowing for a deferral of income taxes on the sale, (b) paying out capital gains to the shareholders with no tax to WRIT or (c) treating the capital gains as having been distributed to the shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to the shareholders.
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed REIT taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRS’s”). Our TRS’s are subject to corporate federal and state income tax on their taxable income at regular statutory rates. During the quarter ended June 30, 2012, we recorded $0.2 million in income tax expense related to temporary differences in the timing of the recognition of revenue, amortization and depreciation in our TRS's. We included this expense in general and administrative expenses on our consolidated statements of income.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Significant Accounting Policies
We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2011.
New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU No. 2011-04, Fair Value Measurement, which requires new disclosures about fair value measurements. Specifically, additional disclosures are required regarding significant unobservable inputs used for Level 3 fair value measurements, a company's valuation process, transfers between Levels 1 and 2, and hierarchy classifications for items whose fair value is not recorded on the balance sheet, but disclosed in the notes. For WRIT, the primary impact of this ASU was to require disclosure of the hierarchy classifications (Level 1, 2 or 3) for our disclosures of the fair values of financial instruments in our notes to the consolidated financial statements. We adopted this ASU on January 1, 2012.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income, which requires the presentation of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in shareholders' equity. This ASU is effective for fiscal years (including interim periods) beginning after December 15, 2011. We adopted this ASU on January 1, 2012 with the presentation of a separate statement of comprehensive income.

Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated accounts of WRIT, its majority-owned subsidiaries and entities in which WRIT has a controlling interest, including where WRIT has been determined to be a primary beneficiary of a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation.
We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read

9


in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Within these notes to the financial statements, we refer to the three months ended June 30, 2012 and June 30, 2011 as the “2012 Quarter” and the “2011 Quarter”, respectively, and the six months ended June 30, 2012 and June 30, 2011 as the “2012 Period” and the “2011 Period”, respectively.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
During the 2012 Quarter, we identified certain immaterial classification errors in our consolidated statements of income and have determined that in this Quarterly Report on Form 10-Q and future periodic reports we will correct these reclassification errors by including within the subtotal “real estate operating income” impairment charges and acquisition costs, which had previously been included in “other income (expense).” These reclassifications totaled $18.1 million, $1.2 million, $0.8 million for the years ended December 31, 2011, 2010 and 2009, $0.1 million and $1.6 million for the three months ended March 31, 2012 and 2011, and $0.3 million and $2.0 million for the three and six months ended June 30, 2011, respectively. These reclassifications will decrease “real estate operating income” and will increase “other income (expense)” by an equal and offsetting amount. As a result, these reclassifications will not change income from continuing operations, net income, cash flows or any other operating measure for the periods affected.
In addition, certain prior year amounts have also been reclassified to conform to the current year presentation due to the reclassification of certain properties as discontinued operations (see note 3 to the consolidated financial statements).
NOTE 3: REAL ESTATE

Acquisition

We acquired the following property during the 2012 Period:
Acquisition Date
 
Property Name
 
Property Type
 
Rentable Square Feet
 
Contract Purchase Price (in thousands)
June 21, 2012
 
Fairgate at Ballston
 
Office
 
147,000

 
$
52,250


The results of operations from the acquired property are included in the consolidated statements of income as of its acquisition date and are immaterial for the nine days that we owned the property during the 2012 Period. The difference in the contract purchase price and the cash paid for the acquisition per the consolidated statements of cash flows is due to credits received at settlement totaling $0.1 million.

Variable Interest Entities
On June 15, 2011, we executed a joint venture operating agreement with a real estate development company to develop a mid-rise multifamily property at 650 North Glebe Road in Arlington, Virginia. We estimate the total cost of the project to be $45.0 million, with approximately 70% of the project financed with debt. WRIT is the 90% owner of the joint venture, and will have management and leasing responsibilities when the project is completed and stabilized (defined as 90% of the residential units leased). The real estate development company owns 10% of the joint venture and is responsible for the development and construction of the property. The joint venture currently expects to complete this development project during the third quarter of 2014.

On November 23, 2011, we executed a joint venture operating agreement with a real estate development company to develop a high-rise multifamily property at 1219 First Street in Alexandria, Virginia. We estimate the total cost of the project to be $95.3 million, with approximately 70% of the project financed with debt. WRIT is the 95% owner of the joint venture and will have management and leasing responsibilities when the project is completed and stabilized. The real estate development company owns 5% of the joint venture and is responsible for the development and construction of the property. The joint venture currently expects to complete this development project during the fourth quarter of 2014.


10


We have determined that the 650 North Glebe Road and 1219 First Street joint ventures are variable interest entities (“VIE's”) primarily based on the fact that the equity investment at risk is not sufficient to permit either entity to finance its activities without additional financial support. We expect that 70% of the total development costs will be financed through debt. We have also determined that WRIT is the primary beneficiary of each VIE due to the fact that WRIT is providing 90% to 95% of the equity contributions and will manage each property after stabilization.
      
We include the joint venture land acquisitions on our consolidated balance sheets in held for development. As of June 30, 2012 and December 31, 2011, the land and capitalized development costs are as follows (in millions):
 
June 30, 2012
 
December 31, 2011
650 North Glebe
$
14.5

 
$
13.4

1219 First Street
$
16.0

 
$
14.4


As of June 30, 2012 and December 31, 2011, the accounts payable and accrued liabilities related to the joint ventures are as follows (in millions):
 
June 30, 2012
 
December 31, 2011
650 North Glebe
$
0.3

 
$
0.1

1219 First Street
$
0.4

 
$
0.2

Discontinued Operations
We dispose of assets (sometimes using tax-deferred exchanges) that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs, or distributed to our shareholders. Properties are considered held for sale when they meet the criteria specified by GAAP. Depreciation on these properties is discontinued at that time, but operating revenues, other operating expenses and interest continue to be recognized until the date of sale. We had no properties classified as sold or held for sale as of June 30, 2012.
We sold or classified as held for sale the following properties during 2011:
Disposition Date
 
Property Name
 
Property Type
 
Rentable Square Feet
 
Contract
Purchase  Price
(In millions)
Various (1)
 
Industrial Portfolio(1)
 
Industrial/Office
 
3,092,000

 
$
350.9

April 5, 2011
 
Dulles Station, Phase I
 
Office
 
180,000

 
58.8

 
 
 
 
Total 2011
 
3,272,000

 
$
409.7

 
(1) 
The Industrial Portfolio consists of every property in our industrial segment and two office properties (the Crescent and Albemarle Point). On September 2, 2011 we closed on the sale of industrial properties (8880 Gorman Road, Dulles South IV, Fullerton Business Center, Hampton Overlook, Alban Business Center, Pickett Industrial Park, Northern Virginia Industrial Park I, 270 Technology Park, Fullerton Industrial Center, Sully Square, 9950 Business Parkway, Hampton South and 8900 Telegraph Road) and two office properties (Crescent and Albemarle Point). On October 3, 2011, we closed on the sale of Northern Virginia Industrial Park II. On November 2, 2011, we closed on the sale of 6100 Columbia Park Road and Dulles Business Park I and II.

11


Operating results of the properties classified as discontinued operations are summarized as follows (in thousands):
 
Quarter Ended June 30,
 
Period Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$

 
$
8,931

 
$

 
$
19,014

Property expenses

 
(2,468
)
 

 
(5,796
)
Real estate impairment

 

 

 
(599
)
Depreciation and amortization

 
(2,933
)
 

 
(6,287
)
Interest expense

 
(232
)
 

 
(465
)
Income from operations of properties sold or held for sale
$

 
$
3,298

 
$

 
$
5,867

Less: Net income attributable to noncontrolling interests in subsidiaries

 
(34
)
 

 
(57
)
Income from operations of properties sold or held for sale attributable to the controlling interests
$

 
$
3,264

 
$

 
$
5,810


Operating income (loss) by each property classified as discontinued operations is summarized below (in thousands):
 
 
 
 
Quarter Ended June 30,
 
Period Ended June 30,
Property
 
Segment
 
2012
 
2011
 
2012
 
2011
Industrial Portfolio
 
Industrial/Office
 
$

 
$
3,308

 
$

 
$
6,335

Dulles Station, Phase I
 
Office
 

 
(10
)
 

 
(468
)
 
 
 
 
$

 
$
3,298

 
$

 
$
5,867


The operating loss for Dulles Station I for the 2011 Period includes a $0.6 million impairment charge to reflect the property’s fair value less any selling costs based on its contract sales price.
NOTE 4: UNSECURED LINES OF CREDIT PAYABLE
During the 2012 Quarter, we executed an amended and restated credit agreement for our Credit Facility No. 1 to expand the facility from $75.0 million to $100.0 million, with an accordion feature that allows us to increase the facility to $200.0 million, subject to additional lender commitments. The amended and restated facility matures June 2015, with a one-year extension option, and bears interest at a rate of LIBOR plus a margin of 107.5 basis points.
During the 2012 Quarter, we entered into an amended and restated credit agreement for our $400.0 million unsecured line of credit (“Credit Facility No. 2”) to extend the maturity date of the facility to July 2016 , with a one-year extension option, and lower the interest rate to LIBOR plus a margin of 107.5 basis points.
The amounts of these lines of credit unused and available at June 30, 2012 are as follows (in millions):
 
Credit Facility
No. 1
 
Credit Facility
No. 2
Committed capacity
$
100.0

 
$
400.0

Borrowings outstanding
(74.0
)
 
(147.0
)
Letters of credit issued
(0.8
)
 

Unused and available
$
25.2

 
$
253.0


We executed borrowings and repayments on the unsecured lines of credit during the 2012 Quarter as follows (in millions):
 
Credit Facility
No. 1
 
Credit Facility
No. 2
Balance at March 31, 2012
$
74.0

 
$
35.0

Borrowings

 
117.0

Repayments

 
(5.0
)
Balance at June 30, 2012
$
74.0

 
$
147.0


12


NOTE 5: NOTES PAYABLE
We repaid our $50.0 million of 5.05% unsecured notes on their due date of May 1, 2012 using borrowings on our unsecured lines of credit.
NOTE 6: STOCK BASED COMPENSATION
WRIT maintains short-term ("STIP") and long-term ("LTIP") incentive plans that provide for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2007 Omnibus Long-Term Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options, and other awards up to an aggregate of 2,000,000 shares over the ten year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares.
Total Compensation Expense
Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards, was as follows (in millions):
 
Quarter Ended June 30,
 
Period Ended June 30,
 
2012
 
2011
 
2012
 
2011
Stock-based compensation expense
$
1.3

 
$
1.5

 
$
2.7

 
$
2.8


Restricted Share Awards
The total fair values of share grants vested was as follows (in millions):
 
Quarter Ended June 30,
 
Period Ended June 30,
 
2012
 
2011
 
2012
 
2011
Fair value of share grants vested
$

 
$

 
$
0.3

 
$
0.3

The total unvested restricted share awards at June 30, 2012 was 313,500 shares, which had a weighted average grant date fair value of $28.40 per share.
As of June 30, 2012, the total compensation cost related to non-vested restricted share awards was $4.2 million, which we expect to recognize as compensation expense over a weighted average period of 24 months.
NOTE 7: FAIR VALUE DISCLOSURES
Financial Assets and Liabilities Measured at Fair Value
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows:
Level 1: Quoted Prices in Active Markets for Identical Assets
Level 2: Significant Other Observable Inputs
Level 3: Significant Unobservable Inputs
The only assets or liabilities we had at June 30, 2012 and December 31, 2011 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Program (“SERP”). We base the valuations related to this item on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy. The fair value of these assets at June 30, 2012 and December 31, 2011 is as follows (in millions):
 
June 30, 2012
 
December 31, 2011
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SERP
$
2.1

 
$

 
$
2.1

 
$

 
$
1.7

 
$

 
$
1.7

 
$


Financial Assets and Liabilities Not Measured at Fair Value
The following disclosures of estimated fair value were determined by management using available market information and

13


established valuation methodologies, including discounted cash flow. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to June 30, 2012 may differ significantly from the amounts presented.
Below is a summary of significant methodologies used in estimating fair values and a schedule of fair values at June 30, 2012.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents and restricted cash include cash and commercial paper with original maturities of less than 90 days, which are valued at the carrying value, which approximates fair value due to the short maturity of these instruments (Level 1 inputs).
Notes Receivable
We acquired a note receivable ("2445 M Street note") in 2008 with the purchase of 2445 M Street. We estimate the fair value of the 2445 M Street note based on a discounted cash flow methodology using market discount rates (Level 3 inputs).
Debt
Mortgage notes payable consist of instruments in which certain of our real estate assets are used for collateral. We estimate the fair value of the mortgage notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads estimated through independent comparisons to real estate assets or loans with similar characteristics. Lines of credit payable consist of bank facilities which we use for various purposes including working capital, acquisition funding or capital improvements. The lines of credit advances are priced at a specified rate plus a spread. We estimate the market value based on a comparison of the spreads of the advances to market given the adjustable base rate. We estimate the fair value of the notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads derived using the relevant securities’ market prices. We classify these fair value measurements as Level 3 as we use significant unobservable inputs and management judgment due to the absence of quoted market prices.
 
June 30, 2012
 
December 31, 2011
(in thousands)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Cash and cash equivalents
$
14,367

 
$
14,367

 
$
12,765

 
$
12,765

Restricted cash
$
19,853

 
$
19,853

 
$
19,424

 
$
19,424

2445 M Street note receivable
$
6,481

 
$
7,540

 
$
6,975

 
$
7,721

Mortgage notes payable
$
425,268

 
$
459,277

 
$
427,710

 
$
463,238

Lines of credit payable
$
221,000

 
$
221,000

 
$
99,000

 
$
99,000

Notes payable
$
607,653

 
$
660,803

 
$
657,470

 
$
713,797

NOTE 8: EARNINGS PER COMMON SHARE
We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income attributable to the controlling interest less the allocation of undistributed earnings to unvested restricted share awards by the weighted-average number of common shares outstanding for the period.
We also determine “Diluted earnings per share” under the two-class method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our diluted earnings per share calculation includes the dilutive impact of employee stock options based on the treasury stock method and our incentive share awards with performance or market conditions under the contingently issuable method. The diluted earnings per share calculation also considers our operating partnership units and 3.875% convertible notes under the if-converted method. The 3.875% convertible notes, which were repaid in full during the third quarter of 2011, were anti-dilutive for the reporting periods during which they were outstanding.

14



The following tables set forth the computation of basic and diluted earnings per share (amounts in thousands; except per share data):
 
Quarter Ended June 30,
 
Period Ended June 30,
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
6,008

 
$
4,431

 
$
11,189

 
$
6,550

Allocation of undistributed earnings to unvested restricted share awards
(176
)
 
(26
)
 
(363
)
 
(49
)
Adjusted income from continuing operations attributable to the controlling interests
5,832

 
4,405

 
$
10,826

 
$
6,501

Income from discontinued operations, including gain on sale of real estate, net of taxes

 
2,125

 

 
4,694

Net income attributable to noncontrolling interests

 
(34
)
 

 
$
(57
)
Allocation of undistributed earnings to unvested restricted share awards

 
(12
)
 

 
(34
)
Adjusted income from discontinuing operations attributable to the controlling interests

 
2,079

 
$

 
$
4,603

Adjusted net income attributable to the controlling interests
$
5,832

 
$
6,484

 
$
10,826

 
$
11,104

Denominator:
 
 
 
 

 

Weighted average shares outstanding – basic
66,241

 
65,954

 
66,218

 
65,920

Effect of dilutive securities:
 
 
 
 
 
 
 
Operating partnership units
117

 

 
117

 

Employee stock options and restricted share awards
22

 
35

 
19

 
28

Weighted average shares outstanding – diluted
66,380

 
65,989

 
66,354

 
65,948

Earnings per common share, basic:
 
 
 
 

 

Continuing operations
$
0.09

 
$
0.07

 
$
0.16

 
$
0.10

Discontinued operations
$

 
$
0.03

 
$

 
$
0.07

 
$
0.09

 
$
0.10

 
$
0.16

 
$
0.17

Earnings per common share, diluted:

 

 

 

Continuing operations
$
0.09

 
$
0.07

 
$
0.16

 
$
0.10

Discontinued operations
$

 
$
0.03

 
$

 
$
0.07

 
$
0.09

 
$
0.10

 
$
0.16

 
$
0.17

NOTE 9: SEGMENT INFORMATION
We have four reportable segments: office, medical office, retail and multifamily. Office buildings provide office space for various types of businesses and professions. Medical office buildings provide offices and facilities for a variety of medical services. Retail centers are typically neighborhood grocery store or drug store anchored retail centers. Multifamily properties provide rental housing for individuals and families throughout the Washington metropolitan area.
We evaluate performance based upon operating income from the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing segments’ performance. Net operating income is a key measurement of our segment profit and loss. Net operating income is defined as segment real estate rental revenue less segment real estate expenses.

15


The following tables present revenues and net operating income for the 2012 and 2011 Quarters and Periods from these segments, and reconciles net operating income of reportable segments to net income as reported (in thousands):
 
Quarter Ended June 30, 2012
 
Office
 
Medical Office
 
Retail
 
Multifamily
 
Corporate and Other
 
Consolidated
Real estate rental revenue
$
38,426

 
$
11,285

 
$
13,970

 
$
13,096

 
$

 
$
76,777

Real estate expenses
13,570

 
3,781

 
3,030

 
5,098

 

 
25,479

Net operating income
$
24,856

 
$
7,504

 
$
10,940

 
$
7,998

 
$

 
$
51,298

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
(25,591
)
General and administrative
 
 
 
 
 
 
 
 
 
 
(4,164
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(15,533
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
(254
)
Other income
 
 
 
 
 
 
 
 
 
 
252

Net income
 
 
 
 
 
 
 
 
 
 
6,008

Less: Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
$
6,008

Capital expenditures
$
7,278

 
$
1,148

 
$
1,154

 
$
1,486

 
$
205

 
$
11,271

Total assets
$
1,158,617

 
$
343,557

 
$
360,012

 
$
245,947

 
$
45,538

 
$
2,153,671


 
Quarter Ended June 30, 2011
 
Office
 
Medical
Office
 
Retail
 
Multifamily
 
Industrial/Flex
 
Corporate
and Other
 
Consolidated
Real estate rental revenue
$
35,219

 
$
11,519

 
$
12,237

 
$
12,709

 
$

 
$

 
$
71,684

Real estate expenses
11,902

 
3,421

 
3,619

 
4,859

 

 

 
23,801

Net operating income
$
23,317

 
$
8,098

 
$
8,618

 
$
7,850

 
$

 
$

 
$
47,883

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
 
 
(22,526
)
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
(4,049
)
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(16,865
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
 
 
(322
)
Other income
 
 
 
 
 
 
 
 
 
 
 
 
310

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
(1,173
)
Income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
3,298

Net income
 
 
 
 
 
 
 
 
 
 
 
 
6,556

Less: Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(34
)
Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
$
6,522

Capital expenditures
$
3,367

 
$
1,288

 
$
1,030

 
$
766

 
$
258

 
$
126

 
$
6,835

Total assets
$
991,238

 
$
352,242

 
$
308,655

 
$
236,358

 
$
223,536

 
$
75,147

 
$
2,187,176


16


 
Period Ended June 30, 2012
 
Office
 
Medical Office
 
Retail
 
Multifamily
 
Corporate and Other
 
Consolidated
Real estate rental revenue
$
77,056

 
$
22,712

 
$
27,415

 
$
26,093

 
$

 
$
153,276

Real estate expenses
27,464

 
7,526

 
6,472

 
10,030

 

 
51,492

Net operating income
$
49,592

 
$
15,186

 
$
20,943

 
$
16,063

 
$

 
$
101,784

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
(51,585
)
General and administrative
 
 
 
 
 
 
 
 
 
 
(7,770
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(31,428
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
(308
)
Other income
 
 
 
 
 
 
 
 
 
 
496

Net income
 
 
 
 
 
 
 
 
 
 
11,189

Less: Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
$
11,189

Capital expenditures
$
15,018

 
$
2,621

 
$
1,414

 
$
2,472

 
$
415

 
$
21,940


 
Period Ended June 30, 2011
 
Office
 
Medical
Office
 
Retail
 
Multifamily
 
Industrial/Flex
 
Corporate
and Other
 
Consolidated
Real estate rental revenue
$
68,652

 
$
22,650

 
$
24,384

 
$
25,202

 
$

 
$

 
$
140,888

Real estate expenses
23,114

 
7,090

 
7,161

 
9,687

 

 

 
47,052

Net operating income
$
45,538

 
$
15,560

 
$
17,223

 
$
15,515

 
$

 
$

 
$
93,836

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
 
 
(44,422
)
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
(7,751
)
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(33,758
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
 
 
(1,971
)
Other income
 
 
 
 
 
 
 
 
 
 
 
 
616

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
(1,173
)
Income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
5,867

Net income
 
 
 
 
 
 
 
 
 
 
 
 
11,244

Less: Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(57
)
Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
$
11,187

Capital expenditures
$
5,833

 
$
1,957

 
$
1,471

 
$
641

 
$
497

 
$
231

 
$
10,630



17


ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on February 27, 2012.
We refer to the three months ended June 30, 2012 and June 30, 2011 as the “2012 Quarter” and the “2011 Quarter”, respectively, and the six months ended June 30, 2012 and June 30, 2011 as the “2012 Period” and the “2011 Period”, respectively.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements include statements in this report preceded by, followed by or that include the words “believe,” “expect,” “intend,” “anticipate,” “potential,” “project,” “will” and other similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for these statements. The following important factors, in addition to those discussed elsewhere in this Form 10-Q, could affect our future results and could cause those results to differ materially from those expressed in the forward-looking statements: (a) the effects of changes in Federal government spending; (b) the economic health of the greater Washington metro region, or other markets we may enter; (c) the timing and pricing of lease transactions; (d) the effect of the recent credit and financial market conditions; (e) the availability and cost of capital; (f) fluctuations in interest rates; (g) the economic health of our tenants; (h) the supply of competing properties; (i) consumer confidence; (j) unemployment rates; (k) consumer tastes and preferences; (l) our future capital requirements; (m) inflation; (n) compliance with applicable laws, including those concerning the environment and access by persons with disabilities; (o) governmental or regulatory actions and initiatives; (p) changes in general economic and business conditions; (q) terrorist attacks or actions; (r) acts of war; (s) weather conditions; (t) the effects of changes in capital available to the technology and biotechnology sectors of the economy, and (u) other factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on February 27, 2012 and our subsequent Quarterly Reports on Form 10-Q. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
General
Introductory Matters
We provide our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows:
Overview. Discussion of our business, operating results, investment activity and capital requirements, and summary of our significant transactions to provide context for the remainder of MD&A.
Results of Operations. Discussion of our financial results comparing the 2012 Quarter to the 2011 Quarter and the 2012 Period to the 2011 Period.
Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows.
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 real estate rental revenue less real estate expenses excluding depreciation and amortization, interest expense and general and administrative expenses. NOI is a non-GAAP supplemental measure to net income.
Funds From Operations (“FFO”), calculated as set forth below under the caption “Funds from Operations.” FFO is a non-GAAP supplemental measure to net income.
Occupancy, calculated as occupied square footage as a percentage of total square footage as of the last day of that period.
Leased percentage, calculated as the percentage of physical net rentable area leased for our commercial segments and percentage of apartments leased for our multifamily segment.

18


Rental rates.
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. A “same-store” property is one that was owned for the entirety of the periods being evaluated, is stabilized from an occupancy standpoint and is included in continuing operations. We consider newly constructed properties to be stabilized when they achieve 90% occupancy. A “non-same-store” property is one that was acquired or placed into service and not at 90% occupancy during either of the periods being evaluated and is included in continuing operations. Results for properties sold or held for sale during any of the periods evaluated are classified as discontinued operations.
Overview
Business
Our revenues are derived primarily from the ownership and operation of income-producing properties in the greater Washington metro region. As of June 30, 2012, we owned a diversified portfolio of 72 properties, totaling approximately 8.7 million square feet of commercial space and 2,540 multifamily units, and land held for development. These 72 properties consisted of 27 office properties, 18 medical office properties, 16 retail centers and 11 multifamily properties.
Operating Results
Our results of operations were as follows (in thousands): 
 
2012
Quarter
 
2011
Quarter
 
$ Change
 
% Change
Real estate rental revenue
$
76,777

 
$
71,684

 
$
5,093

 
7.1
 %
NOI (1)
$
51,298

 
$
47,883

 
$
3,415

 
7.1
 %
Net income attributable to the controlling interests
$
6,008

 
$
6,522

 
$
(514
)
 
(7.9
)%
FFO (2)
$
31,599

 
$
33,154

 
$
(1,555
)
 
(4.7
)%
 
 
 
 
 
 
 
 
(1) See page 24 of the MD&A for reconciliations of NOI to net income.
(2) See page 39 of the MD&A for reconciliations of FFO to net income.
 
The increases in real estate rental revenue and NOI are due to acquisitions made during 2011 and 2012. NOI for the same-store portfolio decreased by $0.8 million primarily due to lower occupancy in the office and medical office segments. The lower occupancy reflects continued difficulties in leasing vacant office space. For the Washington metro region, overall office vacancy was 12.6% for the 2012 Quarter, up from 12.1% one year ago, according to Delta Associates/Transwestern Commercial Services ("Delta"). We expect real estate market conditions to remain challenging for the remainder of 2012, as, according to Delta, uncertainty over the Federal budget and the broader economic climate is causing hesitancy among tenants and dampening leasing activity.
Capital Requirements
As of June 30, 2012, our unsecured lines of credit had $221.0 million in borrowings outstanding and $0.8 million in letters of credit issued, leaving a remaining borrowing capacity of $278.2 million.
During the 2012 Quarter, we executed an amended and restated credit agreement for our Credit Facility No. 1 to expand the facility from $75.0 million to $100.0 million, with an accordion feature that allows us to increase the facility to $200.0 million, subject to additional lender commitments. The amended and restated facility matures June 2015, with a one-year extension option, and bears interest at a rate of LIBOR plus a margin of 107.5 basis points.
During the 2012 Quarter, we entered into an amended and restated credit agreement for our $400.0 million unsecured line of credit (“Credit Facility No. 2”) to extend the maturity date of the facility to July 2016, with a one-year extension option, and lower the interest rate to LIBOR plus a margin of 107.5 basis points.
We repaid our $50.0 million of 5.05% unsecured notes on their maturity date of May 1, 2012 using borrowings on our unsecured lines of credit. Subsequent to the end of the 2012 Quarter, we prepaid $21.4 million of mortgage notes payable without penalty on August 1, 2012 using borrowings on our unsecured lines of credit.

19


Significant Transactions
We summarize below our significant transactions during the 2012 and 2011 Periods:
2012 Period
The acquisition of an office building for $52.3 million, adding approximately 147,000 square feet. We incurred $0.2 million in acquisition costs related to this transaction.
The execution of an amended and restated credit agreement for our Credit Facility No. 1 to expand the facility from $75.0 million to $100.0 million, with an accordion feature that allows us to increase the facility to $200.0 million, subject to additional lender commitments. The amended and restated facility matures June 2015, with a one-year extension option, and bears interest at a rate of LIBOR plus a margin of 107.5 basis points.
The execution of an amended and restated credit agreement for Credit Facility No. 2, our $400.0 million unsecured line of credit, to extend the maturity date of the facility to July 2016 , with a one-year extension option, and lower the interest rate to LIBOR plus a margin of 107.5 basis points.
The execution of new leases for 0.5 million square feet of commercial space (excluding first generation leases at recently-built properties and properties sold or held for sale), with an average rental rate increase of 12.5% over expiring leases.
2011 Period
The disposition of Dulles Station I, a 180,000 square foot office building in Herndon, Virginia, for a contract sales price of $58.8 million.
The acquisition of two office buildings for $127.3 million, adding approximately 314,000 square feet. We incurred $1.6 million in acquisition costs related to these purchase transactions.
The acquisition of approximately 37,000 square feet of land in Arlington, Virginia for $11.8 million through a consolidated joint venture of which WRIT is a 90% owner. The joint venture intends to develop a mid-rise apartment community on this land.
The execution of new leases for 0.8 million square feet of commercial space (excluding first generation leases at recently-built properties), with an average rental rate increase of 5.4% from expiring leases.
Results of Operations
The discussion that follows is based on our consolidated results of operations for the 2012 and 2011 Quarters and Periods. The ability to compare one period to another may be significantly affected by acquisitions completed and dispositions made during those periods. To provide more insight into our operating results, we divide our discussion into two main sections:
Consolidated Results of Operations: Overview analysis of results on a consolidated basis.
Net Operating Income (“NOI”): Detailed analysis of same-store and non-same-store NOI results by segment.
Consolidated Results of Operations
Real Estate Rental Revenue
Real estate rental revenue for properties classified as continuing operations is summarized as follows (all data in thousands except percentage amounts):
 
Quarter Ended June 30,
 
Period Ended June 30,
 
 
 
 
 
Change
 
 
 
 
 
Change
 
2012
 
2011
 
$
 
%
 
2012
 
2011
 
$
 
%
Minimum base rent
$
67,357

 
$
62,846

 
$
4,511

 
7.2
 %
 
$
134,597

 
$
124,369

 
$
10,228

 
8.2
%
Recoveries from tenants
7,478

 
6,687

 
791

 
11.8
 %
 
14,460

 
12,866

 
1,594

 
12.4
%
Provisions for doubtful accounts
(1,486
)
 
(717
)
 
(769
)
 
107.3
 %
 
(2,560
)
 
(2,141
)
 
(419
)
 
19.6
%
Lease termination fees
42

 
44

 
(2
)
 
(4.5
)%
 
326

 
112

 
214

 
191.1
%
Parking and other tenant charges
3,386

 
2,824

 
562

 
19.9
 %
 
6,453

 
5,682

 
771

 
13.6
%
 
$
76,777

 
$
71,684

 
$
5,093

 
7.1
 %
 
$
153,276

 
$
140,888

 
$
12,388

 
8.8
%

20



Minimum Base Rent: Minimum base rent increased by $4.5 million in the 2012 Quarter primarily due to acquisitions ($5.1 million) and higher rental rates ($1.1 million) at same-store properties, partially offset by lower occupancy ($1.5 million) at same-store properties.

Minimum base rent increased by $10.2 million in the 2012 Period primarily due to acquisitions ($10.6 million) and higher rental rates ($2.0 million) at same-store properties, partially offset by lower occupancy ($1.9 million) at same-store properties.
Recoveries from Tenants: Recoveries from tenants increased by $0.8 million in the 2012 Quarter primarily due to acquisitions.
Recoveries from tenants increased by $1.6 million in the 2012 Period primarily due to acquisitions ($2.0 million) and higher reimbursements for real estate taxes ($0.3 million) from same-store properties, partially offset by lower operating expense reimbursements ($0.6 million) from same-store properties.
Provisions for Doubtful Accounts: Provisions for doubtful accounts increased by $0.8 million in the 2012 Quarter due to higher provisions across the portfolio, particularly in the office ($0.3 million) and retail ($0.3 million) segments.
Provisions for doubtful accounts increased by $0.4 million in the 2012 Period due to higher provisions in the office ($0.1 million) and retail ($0.4 million) segments, offset by lower provisions in the medical office segment ($0.1 million).
Lease Termination Fees: Lease termination fees were flat in the 2012 Quarter and increased by $0.2 million in the 2012 Period, primarily in the office segment.
Parking and Other Tenant Charges: Parking and other tenant charges increased by $0.6 million in the 2012 Quarter primarily due to acquisitions ($0.2 million), as well as higher percentage rent ($0.2 million) and parking income ($0.1 million) from same-store properties.
Parking and other tenant charges increased by $0.8 million in the 2012 Period primarily due to acquisitions ($0.5 million) and higher parking income ($0.2 million) from same-store properties.

A summary of occupancy for properties classified as continuing operations by segment follows:
 
As of June 30,
 
2012
 
2011
 
Change
Office
85.8
%
 
88.2
%
 
(2.4
)%
Medical Office
86.4
%
 
87.3
%
 
(0.9
)%
Retail
93.3
%
 
92.0
%
 
1.3
 %
Multifamily
94.8
%
 
95.6
%
 
(0.8
)%
Total
89.3
%
 
90.5
%
 
(1.2
)%

Occupancy represents occupied square footage indicated as a percentage of total square footage as of the last day of that period.
A detailed discussion of occupancy by segment can be found in the NOI section.
Real Estate Expenses
Real estate expenses for properties classified as continuing operations are summarized as follows (all data in thousands except percentage amounts):
 
Quarter Ended June 30,
 
Period Ended June 30,
 
 
 
 
 
Change
 
 
 
 
 
Change
 
2012
 
2011
 
$
 
%
 
2012
 
2011
 
$
 
%
Property operating expenses
$
17,909

 
$
17,179

 
$
730

 
4.2
%
 
$
36,087

 
$
33,696

 
$
2,391

 
7.1
%
Real estate taxes
7,570

 
6,622

 
948

 
14.3
%
 
15,405

 
13,356

 
2,049

 
15.3
%
 
$
25,479

 
$
23,801

 
$
1,678

 
7.1
%
 
$
51,492

 
$
47,052

 
$
4,440

 
9.4
%

Real estate expenses as a percentage of revenue were 33.2% and 33.2% for the 2012 and 2011 Quarters, respectively, and 33.6% and 33.4% for the 2012 and 2011 Periods, respectively.

21


Property Operating Expenses: Property operating expenses include utilities, repairs and maintenance, property administration and management, operating services, common area maintenance, property insurance, bad debt and other operating expenses.
Property operating expenses increased by $0.7 million in the 2012 Quarter primarily due to properties acquired in 2011 and 2012 ($1.4 million), partially offset by lower write-offs of receivables ($0.6 million) and lower utilities expense ($0.2 million) at same-store properties.
Property operating expenses increased by $2.4 million in the 2012 Period primarily due to properties acquired in 2011 and 2012 ($3.0 million), partially offset by lower utilities expense ($0.7 million) at same-store properties.
Real Estate Taxes: Real estate taxes increased by $0.9 million in the 2012 Quarter primarily due to acquisitions ($0.6 million) and higher assessments ($0.3 million) on our same-store properties, primarily in the multifamily segment.
Real estate taxes increased by $2.0 million in the 2012 Period primarily due to acquisitions ($1.6 million) and higher assessments ($0.5 million) on our same-store properties.

Other Operating Expenses
Other operating expenses are summarized as follows (all data in thousands except percentage amounts):
 
Quarter Ended June 30,
 
Period Ended June 30,
 
 
 
 
 
Change
 
 
 
 
 
Change
 
2012
 
2011
 
$
 
%
 
2012
 
2011
 
$
 
%
Depreciation and amortization
$
25,591

 
$
22,526

 
$
3,065

 
13.6
 %
 
$
51,585

 
$
44,422

 
$
7,163

 
16.1
 %
Interest expense
15,533

 
16,865

 
(1,332
)
 
(7.9
)%
 
31,428

 
33,758

 
(2,330
)
 
(6.9
)%
Acquisition costs
254

 
322

 
(68
)