ELME COMMUNITIES 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 endedDecember 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
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 endedDecember 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 inApril 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 ofJanuary 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 ofJanuary 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 ofDecember 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 theWashington 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 endedDecember 31, 2020 . 30
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Operating Results
Net (loss) income, NOI and NAREIT FFO for the years ended
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 inOctober 2020 without penalty using borrowings from our Revolving Credit Facility. •The execution of the one-year,$150.0 million 2020 Term Loan, maturing onMay 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 onNovember 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 onDecember 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 31 --------------------------------------------------------------------------------
swaps on our consolidated income statements.
As ofFebruary 11, 2021 , our$700.0 million Revolving Credit Facility has an incremental borrowing capacity of$658.0 million . As ofDecember 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 endedDecember 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. 32 --------------------------------------------------------------------------------
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
(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
(2)Development/redevelopment properties:
Multifamily development property - Trove and land adjacent to
(3)Sold (classified as continuing operations):
2020 Office - John Marshall II, Monument II and
(4) Discontinued operations:
2019 Retail -
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
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
33
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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
Ending occupancy for properties classified as continuing operations for the two
years ended
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 ofDecember 31, 2020 . •Multifamily: Decrease in same-store ending occupancy was primarily due to lower ending occupancy at3801 Connecticut Avenue , The Kenmore, Yale West and The Maxwell, partially offset by higher ending occupancy atBethesda Hill Apartments . •Office: Decrease in same-store ending occupancy was primarily due to lower ending occupancy at Silverline Center,2000 M Street , and1775 Eye Street , partially offset by higher ending occupancy at 1220 19th Street, Fairgate at Ballston and Watergate 600.
During the year ended
Average Rental Leasing Costs
Rate (1)
Square Feet (per square % Rental Rate (per square Free Rent (weighted
(in thousands) foot) Increase foot) average months)
Office 214 $ 47.37 14.4 % $ 32.34 4.4
______________________________
(1) Consist of tenant improvements and leasing commissions.
34
--------------------------------------------------------------------------------Real Estate Expenses
Real estate expenses as a percentage of revenue for the two years ended
Real estate expenses from same-store properties for the two years ended
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.
35
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Interest Expense: Interest expense by debt type for the two years ended
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 ) andFrederick Crossing andFrederick County Square ($9.5 million ), partially offset by a loss on the sale of Centre atHagerstown ($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. 36 --------------------------------------------------------------------------------
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
InApril 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 onApril 21, 2020 . InMay 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 onNovember 30, 2020 . InSeptember 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 onDecember 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 inMay 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 ofFebruary 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 endedDecember 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. 37 -------------------------------------------------------------------------------- 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 greaterWashington 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. 38 --------------------------------------------------------------------------------
As of
[[Image Removed: wre-20201231_g6.jpg]]
Unsecured Notes Revolving Average Interest
Year Payable/Term Loans Credit Facility Total Debt 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 ofJuly 2023 . The 2018 Term Loan has an all-in fixed interest rate of 2.87%. (2)Maturity date for credit facility ofMarch 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 onDecember 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 ofDecember 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
OnMay 4, 2018 , we entered into eight separate equity distribution agreements (collectively, the "2018 Equity Distribution Agreements") with each ofWells 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. andTruist Securities, Inc. (f/k/aSunTrust 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 endedDecember 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 endedDecember 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 ofDecember 31, 2020 , no preferred shares are issued and outstanding. 40 --------------------------------------------------------------------------------
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 TheWellington and predevelopment activities for the ground-up development of a multifamily property on land adjacent toRiverside Apartments . As ofDecember 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 atDecember 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
Payments due by Period
Less than 1 After 5
Total year 1-3 years 4-5 years 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 ofDecember 31, 2020 . (4)Committed building capital additions based on contracts in place as ofDecember 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. 41 --------------------------------------------------------------------------------
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 endedDecember 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
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 and1776 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) and2445 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
Year Ended
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
42
--------------------------------------------------------------------------------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 atRiverside Apartments ; retail space renovations at1775 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 at3801 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 TheWellington and predevelopment costs for a future multifamily development adjacent toRiverside 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 endedDecember 31, 2020 were as follows: Year Ended December 31, 2020 2019 2018 Office$ 23.03 $ 69.99 $ 33.51
The
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
43
--------------------------------------------------------------------------------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 greaterWashington 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, theNational 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. 44 -------------------------------------------------------------------------------- The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net income for the three years endedDecember 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
45
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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 corporateU.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 bothDecember 31, 2020 and 2019, our TRSs had a deferred tax asset of$1.4 million that was fully reserved. As ofDecember 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 ofDecember 31, 2020 . 46
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