WRE Washington REIT

Washington Real Estate Investment Trust (“WashREIT” or the “Company”) (NYSE: WRE), a multifamily REIT with properties in the Washington metro area and the Southeast, reported financial and operating results today for the quarter and year ended December 31, 2021:

Full-Year 2021 Financial and Operational Results

• Net income was $16.4 million, or $0.19 per diluted share
• NAREIT FFO was $65.5 million, or $0.77 per diluted share
• Core FFO was $1.06 per diluted share
• Net Operating Income (NOI) was $108.4 million
• Same-store Multifamily NOI decreased by 1.8% for the year and 0.9% on a cash basis for the year
• Same-store Other NOI increased by 0.6% for the year

Fourth Quarter 2021 Financial and Operational Results

• Net loss was $6.8 million, or $0.08 per diluted share
• NAREIT FFO was $13.3 million, or $0.16 per diluted share
• Core FFO was $0.17 per diluted share
• NOI was $29.1 million           
• Same-store Multifamily NOI increased by 4.2% year-over-year and 8.0% on a cash basis
• Effective new Lease Rate Growth was 8.7%, effective renewal Lease Rate Growth was 8.2%, and effective blended Lease Rate Growth was 8.4% during the quarter for our same-store portfolio
• Retention increased to 72% compared to 51% in the fourth quarter of 2020 driven by a reduction in move-outs related to home purchases and transfers within our apartment communities
• Same-store Average Occupancy increased 1.9% from the fourth quarter of 2020 to 95.9%, and same-store Ending Occupancy increased 1.7% from the fourth quarter of 2020 to 96.0%
• Trove stabilized during the fourth quarter and ended the year with occupancy of 94.5%. Trove is expected to add approximately $7.0 million of NOI in 2022 and $8.0 million in 2023

YTD Highlights

• Atlanta acquisitions are performing very well and are contributing NOI growth that is above our initial expectations
• Same-store portfolio is off to a strong start in 2022 with increasing lease rate momentum supported by strong retention and occupancy
• New lease executions increased approximately 10.7% for our same-store communities and 22.4% for our Atlanta communities on an effective average year-to-date basis
• Renewal lease executions increased 9.7% for our same-store communities and 13.7% for our Atlanta communities on an effective average year-to-date basis

Transformation Update

• Completed the acquisitions of 860 South and 900 Dwell, two adjacent garden style apartment communities in Stockbridge, GA, for a total of $106 million on November 19, 2021. We believe that significant economies of scale can be achieved from operating and managing these properties together, and we are focused on unlocking that value. We will refer to these properties collectively as Assembly Eagles Landing.
• Completed the acquisition of Carlyle of Sandy Springs, a garden style community located in Sandy Springs, GA, for $106 million on February 1, 2022.

Liquidity Position

• Available liquidity was approximately $930 million as of December 31st, consisting of the entire capacity under the Company's $700 million revolving credit facility and cash on hand
• The Company has no secured debt and no scheduled debt maturities until July 2023
• During the fourth quarter, issued 1,611,618 common shares through the Company’s At-the-Market (ATM) program at an average share price of $25.49 for gross proceeds of $41.1 million. Subsequent to year end, the Company issued another 1,032,286 common shares through the ATM program at an average share price of $26.27 for gross proceeds of $27.1 million, for a combined total of 2,643,904 common shares for gross proceeds of approximately $68.2 million.

"Our 2021 results reflect our transformation into multifamily, which is the asset class we identified as having the best long term growth prospects," said Paul T. McDermott, President and CEO. "We continue to make progress on our geographic expansion and have deployed approximately 60% of our commercial sale net proceeds and are in process on multiple opportunities that would improve our NOI growth trajectory. We expect to deploy the remainder of the net sale proceeds from our commercial portfolio sales by early in the second quarter of 2022. We believe we will continue to execute on opportunities that fit our portfolio strategies and to create increasing long-term value for our shareholders.”

Fourth Quarter Operating Results

• Multifamily Same-store NOI - Same-store NOI increased 4.2% compared to the corresponding prior year period and 8.0% on a cash basis, which includes the impact of cash concessions. Average occupancy for the quarter increased 1.9% from the prior year period to 95.9%.
• Other Same-store NOI - The Other same-store portfolio is comprised of one asset, Watergate 600. Same-store NOI increased by 7.7% compared to the corresponding prior year period due to higher rental and parking income partially offset by higher operating expenses. Watergate 600 was 91.3% occupied and 92.4% leased at year end.

"Our portfolio is performing historically well and certainly outperforming our normal seasonal patterns," said Steve Riffee, Executive Vice President and CFO. "Effective lease rates have continued to grow through the winter months further boosted by concessions burning off and a very limited amount of new concessions being issued, occupancy that is historically strong as we head into the spring and summer leasing seasons, and very strong renewal demand. The trends that we are seeing keep us confident that we should have strong NOI growth throughout 2022 into 2023."

2022 Guidance

Core FFO for 2022 is expected to range from $0.87 to $0.93 per fully diluted share. The following assumptions are included in the Core FFO guidance for 2022 as set forth below:

Full Year Outlook on Key Assumptions and Metrics

• Same-store multifamily NOI growth is expected to range between 7.75% to 9.75%
• Same-store multifamily and Trove NOI, which was fully delivered and invested by the start of 2021, is expected to grow between 11.5% and 13.5%
• Non same-store multifamily NOI is expected to range from $17.75 million to $18.5 million in 2022 including Trove, which is expected to contribute approximately $7.0 million of NOI
• Other same-store NOI, which consists solely of Watergate 600, is expected to range from $13.0 million to $13.75 million
• The acquisition of Carlyle of Sandy Springs closed on February 1, 2022 for $106 million   
• Approximately $270 million to $290 million of additional multifamily acquisitions are expected to be completed in the Southeastern markets of Atlanta, and/or Charlotte, Raleigh/Durham in the first half of the year
• Core AFFO payout ratio is expected to be in the mid-70% range

	Full Year 2022
Core FFO per diluted share	$0.87 - $0.93
Net Operating Income
Same-store multifamily NOI growth	7.75% - 9.75%
Same-store multifamily and Trove NOI growth	11.5% - 13.5%
Non-same-store NOI (a)	$17.75 million - $18.5 million
Non-residential NOI (b)	~$0.75 million
Other same-store NOI (c)	$13.0 million - $13.75 million
Transactions
Acquisitions (d)	$270 million - $290 million
Expenses
Property Management Expenses	$7.5 million - $8.0 million
G&A	$25.5 million - $26.5 million
Interest expense	$24.75 million - $25.75 million
Transformation costs	$11.0 million - $13.0 million

(a) Includes Trove, The Oxford, Assembly Eagles Landing, and Carlyle of Sandy Springs(b) Includes revenues and expenses from retail operations at multifamily properties(c) Other NOI consists of Watergate 600(d) Anticipated completion in first half of 2022, assumes full deployment of remaining commercial sale net proceeds plus levered     ATM proceeds

WashREIT's Core FFO guidance and outlook are based on a number of factors, many of which are outside the Company's control and all of which are subject to change. WashREIT may change the guidance provided during the year as actual and anticipated results vary from these assumptions, but WashREIT undertakes no obligation to do so.

2022 Guidance Reconciliation Table

A reconciliation of projected net loss per diluted share to projected Core FFO per diluted share for the full year ending December 31, 2022 is as follows:

	Low				High
Net loss per diluted share	$	(0.27	)		$	(0.23	)
Real estate depreciation and amortization		1.01				1.01
NAREIT FFO per diluted share		0.74				0.78
Core adjustments		0.13				0.15
Core FFO per diluted share	$	0.87			$	0.93

Dividends

On January 5, 2022, WashREIT paid a quarterly dividend of $0.17 per share.

WashREIT announced today that its Board of Trustees has declared a quarterly dividend of $0.17 per share to be paid on April 5, 2022 to shareholders of record on March 23, 2022.

Conference Call Information

The Fourth Quarter 2021 Earnings Call is scheduled for Friday, February 18, 2022 at 11:00 A.M. Eastern Time. Conference Call access information is as follows:

USA Toll Free Number:	1-888-506-0062
International Toll Number:	1-973-528-0011
Conference ID:	484083

The instant replay of the Earnings Call will be available until Friday, March 4, 2022. Instant replay access information is as follows:

USA Toll Free Number:	1-877-481-4010
International Toll Number:	1-919-882-2331
Conference ID:	44242

The live on-demand webcast of the Conference Call will be available on the Investor section of WashREIT's website at www.washreit.com. Online playback of the webcast will be available following the Conference Call.

About WashREIT

WashREIT owns approximately 8,200 residential apartment homes in the Washington, DC metro and the Southeast. WashREIT also owns and operates approximately 300,000 square feet of commercial space in the Washington, DC metro region. We are focused on providing quality housing to under-served, middle-income renters in submarkets poised for strong, sustained demand. With a proven track record in residential repositioning, we are utilizing the experience and research from the Washington, DC metro region to continue to grow as we geographically diversify into Southeastern markets. We are targeting the deepest demand segments in submarkets with the greatest probability of rent growth outperformance, and tailoring our specific investment strategy to best create value.

Note: WashREIT's press releases and supplemental financial information are available on the Company website at www.washreit.com or by contacting Investor Relations at (202) 774-3200.

Forward Looking StatementsCertain statements in our earnings release and on our conference call are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. 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. Currently, one of the most significant factors continues to be the adverse effect of the COVID-19 virus, including any variants and mutations thereof, the actions taken to contain the pandemic or mitigate the impact of COVID-19, and the direct and indirect economic effects of the pandemic and containment measures. The extent to which COVID-19 continues to impact WashREIT, its properties and its residents and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, 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 continued speed and success of the vaccine distribution, effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and their efficacy against emerging variants of COVID-19, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional 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 include, but are not limited to the risks associated with the failure to enter into and/or complete contemplated acquisitions or dispositions within the price ranges anticipated and on the terms and timing anticipated, or at all; our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of residential properties in the Southeastern markets, on the terms anticipated, or at all, and to realize any anticipated benefits, including the performance of any acquired residential properties at the levels anticipated; whether our actual 2022 NOI for Trove will be consistent with our expected NOI for Trove; the risks associated with ownership of real estate in general and our real estate assets in particular; the economic health of the greater Washington, DC metro region and the larger Southeastern region; changes in the composition and geographic location of our portfolio; fluctuations in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers; the economic health of our residents and tenants; the availability and terms of financing and capital and the general volatility of securities markets; compliance with applicable laws, including those concerning the environment and access by persons with disabilities; the risks related to not having adequate insurance to cover potential losses; the risks related to our organizational structure and limitations of stock ownership; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2020 Form 10-K filed on February 16, 2021 and our quarterly report on Form 10-Q filed on October 29, 2021. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.

This Earnings Release also includes certain forward-looking non-GAAP information. Due to the high variability and difficulty in making accurate forecasts and projections of some of the information excluded from these estimates, together with some of the excluded information not being ascertainable or accessible, the Company is unable to quantify certain amounts that would be required to be included in the most directly comparable GAAP financial measures without unreasonable efforts.

CONTACT:

Amy Hopkins

Vice President, Investor Relations

E-Mail: ahopkins@washreit.com

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
(Unaudited)
	Three Months Ended December 31,								Twelve Months Ended December 31,
OPERATING RESULTS		2021				2020				2021				2020
Revenue
Real estate rental revenue	$	44,748			$	42,788			$	169,151			$	176,004
Expenses
Property operating and maintenance		10,086				10,027				38,741				39,625
Real estate taxes and insurance		5,516				5,937				22,041				23,357
Property management		1,685				1,463				6,133				6,145
General and administrative		7,700				5,988				27,538				23,951
Transformation costs		1,839				—				6,635				—
Depreciation and amortization		20,114				17,653				72,656				70,336
		46,940				41,068				173,744				163,414
Loss on sale of real estate		—				(7,470	)			—				(15,009	)
Real estate operating loss		(2,192	)			(5,750	)			(4,593	)			(2,419	)
Other income (expense)
Interest expense		(5,676	)			(8,998	)			(34,063	)			(37,305	)
Loss on interest rate derivatives		—				(560	)			(5,866	)			(560	)
Loss on extinguishment of debt		—				(296	)			(12,727	)			(34	)
Other income		1,072				—				4,109				—
		(4,604	)			(9,854	)			(48,547	)			(37,899	)
Loss from continuing operations		(6,796	)			(15,604	)			(53,140	)			(40,318	)
Discontinued operations:
Income from operations of properties sold or held for sale		—				4,567				23,083				24,638
Gain on sale of real estate, net		—				—				46,441				—
Income from discontinued operations		—				4,567				69,524				24,638
Net (loss) income	$	(6,796	)		$	(11,037	)		$	16,384			$	(15,680	)
Loss from continuing operations	$	(6,796	)		$	(15,604	)		$	(53,140	)		$	(40,318	)
Depreciation and amortization		20,114				17,653				72,656				70,336
Loss on sale of depreciable real estate		—				7,470				—				15,009
Funds from continuing operations		13,318				9,519				19,516				45,027
Income from discontinued operations		—				4,567				69,524				24,638
Discontinued operations real estate depreciation and amortization		—				12,588				22,904				49,694
Gain on sale of real estate, net		—				—				(46,441	)			—
Funds from discontinued operations		—				17,155				45,987				74,332
NAREIT funds from operations	$	13,318			$	26,674			$	65,503			$	119,359
Non-cash loss (gain) on extinguishment of debt	$	—			$	296			$	833			$	(881	)
Tenant improvements and incentives, net of reimbursements		(642	)			(6,250	)			(1,546	)			(13,212	)
Leasing commissions capitalized		(24	)			(1,445	)			(2,808	)			(3,852	)
Recurring capital improvements		(1,366	)			(2,164	)			(4,874	)			(5,044	)
Straight-line rents, net		(218	)			82				(1,738	)			(1,758	)
Non-cash fair value interest expense		—				—				—				(59	)
Non-real estate depreciation & amortization of debt costs		1,241				987				5,265				3,795
Amortization of lease intangibles, net		(172	)			477				368				1,942
Amortization and expensing of restricted share and unit compensation		2,075				1,972				8,553				7,873
Adjusted funds from operations	$	14,212			$	20,629			$	69,556			$	108,163

		Three Months Ended December 31,								Twelve Months Ended December 31,
Per share data:			2021				2020				2021				2020
Loss from continuing operations	(Basic)	$	(0.08	)		$	(0.19	)		$	(0.63	)		$	(0.50	)
	(Diluted)	$	(0.08	)		$	(0.19	)		$	(0.63	)		$	(0.50	)
Net (loss) income	(Basic)	$	(0.08	)		$	(0.13	)		$	0.19			$	(0.20	)
	(Diluted)	$	(0.08	)		$	(0.13	)		$	0.19			$	(0.20	)
NAREIT FFO	(Basic)	$	0.16			$	0.32			$	0.77			$	1.44
	(Diluted)	$	0.16			$	0.32			$	0.77			$	1.44
Dividends paid		$	0.17			$	0.30			$	0.94			$	1.20
Weighted average shares outstanding - basic			84,804				82,962				84,544				82,348
Weighted average shares outstanding - diluted			84,804				82,962				84,544				82,348
Weighted average shares outstanding - diluted (for NAREIT FFO)			84,911				83,093				84,629				82,516

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
	December 31, 2021				December 31, 2020
Assets
Land	$	322,623			$	301,709
Income producing property		1,642,147				1,473,335
		1,964,770				1,775,044
Accumulated depreciation and amortization		(402,560	)			(335,006	)
Net income producing property		1,562,210				1,440,038
Properties under development or held for future development		30,631				36,494
Total real estate held for investment, net		1,592,841				1,476,532
Investment in real estate held for sale, net		—				795,687
Cash and cash equivalents		233,600				7,697
Restricted cash		620				593
Rents and other receivables		15,067				11,888
Prepaid expenses and other assets		33,866				29,587
Other assets related to properties sold or held for sale		—				87,834
Total assets	$	1,875,994			$	2,409,818
Liabilities
Notes payable, net	$	496,946			$	945,370
Line of credit		—				42,000
Accounts payable and other liabilities		40,585				44,067
Dividend payable		14,650				25,361
Advance rents		2,082				2,461
Tenant security deposits		4,669				4,221
Other liabilities related to properties sold or held for sale		—				25,229
Total liabilities		558,932				1,088,709
Equity
Shareholders' equity
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding		—				—
Shares of beneficial interest, $0.01 par value; 150,000 and 100,000 shares authorized; 86,261 and 84,409 shares issued and outstanding, as of December 31, 2021 and December 31, 2020, respectively		863				844
Additional paid in capital		1,697,477				1,649,366
Distributions in excess of net income		(362,494	)			(298,860	)
Accumulated other comprehensive loss		(19,091	)			(30,563	)
Total shareholders' equity		1,316,755				1,320,787
Noncontrolling interests in subsidiaries		307				322
Total equity		1,317,062				1,321,109
Total liabilities and equity	$	1,875,994			$	2,409,818

The following tables contain reconciliations of net loss (income) to NOI for the periods presented (in thousands):
	Three Months Ended December 31,								Twelve Months Ended December 31,
		2021				2020				2021				2020
Net (loss) income	$	(6,796	)		$	(11,037	)		$	16,384			$	(15,680	)
Adjustments:
Property management		1,685				1,463				6,133				6,145
General and administrative		7,700				5,988				27,538				23,951
Transformation costs		1,839				—				6,635				—
Real estate depreciation and amortization		20,114				17,653				72,656				70,336
Loss on sale of real estate		—				7,470				—				15,009
Interest expense		5,676				8,998				34,063				37,305
Loss on interest rate derivatives		—				560				5,866				560
Loss on extinguishment of debt, net		—				296				12,727				34
Other income		(1,072	)			—				(4,109	)			—
Discontinued operations:
Income from operations of properties sold or held for sale		—				(4,567	)			(23,083	)			(24,638	)
Gain on sale of real estate, net		—				—				(46,441	)			—
Total Net Operating Income (NOI)	$	29,146			$	26,824			$	108,369			$	113,022
Multifamily NOI:
Same-store portfolio	$	23,137			$	22,209			$	90,189			$	91,863
Acquisitions		1,121				—				1,397				—
Development		1,385				14				3,117				(185	)
Non-residential		160				221				735				608
Total		25,803				22,444				95,438				92,286
Watergate 600 NOI		3,343				3,105				12,931				12,853
Other NOI (1)		—				1,275				—				7,883
Total NOI	$	29,146			$	26,824			$	108,369			$	113,022
Multifamily same-store NOI	$	23,137			$	22,209			$	90,189			$	91,863
Adjust: Straight-lining of apartment lease concessions		400				(410	)			197				(613	)
Multifamily same-store Cash NOI	$	23,537			$	21,799			$	90,386			$	91,250

(1) Represents other continuing operations office properties sold in 2020: Monument II, 1227 25th Street, John Marshall II

The following table contains a reconciliation of net (loss) income to core funds from operations for the periods presented (in thousands, except per share data):
		Three Months Ended December 31,								Twelve Months Ended December 31,
			2021				2020				2021				2020
Net (loss) income		$	(6,796	)		$	(11,037	)		$	16,384			$	(15,680	)
Add:
Real estate depreciation and amortization			20,114				17,653				72,656				70,336
Loss on sale of depreciable real estate			—				7,470				—				15,009
Discontinued operations:
Gain on sale of real estate, net			—				—				(46,441	)			—
Real estate depreciation and amortization			—				12,588				22,904				49,694
NAREIT funds from operations			13,318				26,674				65,503				119,359
Add:
Loss on extinguishment of debt, net			—				296				12,727				34
Loss on interest rate derivatives			—				560				5,866				560
Severance expense			—				—				173				—
Transformation costs			1,839				—				6,635				—
Insurance gain			(1,026	)			—				(1,026	)			—
Core funds from operations		$	14,131			$	27,530			$	89,878			$	119,953
		Three Months Ended December 31,								Twelve Months Ended December 31,
Per share data:			2021				2020				2021				2020
NAREIT FFO	(Basic)	$	0.16			$	0.32			$	0.77			$	1.44
	(Diluted)	$	0.16			$	0.32			$	0.77			$	1.44
Core FFO	(Basic)	$	0.17			$	0.33			$	1.06			$	1.45
	(Diluted)	$	0.17			$	0.33			$	1.06			$	1.45
Weighted average shares outstanding - basic			84,804				82,962				84,544				82,348
Weighted average shares outstanding - diluted (for NAREIT and Core FFO)			84,911				83,093				84,629				82,516

Non-GAAP Financial Measures

Adjusted EBITDA is earnings before interest expense, taxes, depreciation, amortization, gain/loss on sale of real estate, casualty gain/loss, real estate impairment, gain/loss on extinguishment of debt, gain/loss on interest rate derivatives, severance expense, acquisition expenses and gain from non-disposal activities and transformation costs. Adjusted EBITDA is included herein because we believe it helps investors and lenders understand our ability to incur and service debt and to make capital expenditures. Adjusted EBITDA is a non-GAAP and non-standardized measure and may be calculated differently by other REITs.

Adjusted Funds From Operations (“AFFO”) is a non-GAAP measure. It is calculated by subtracting from FFO (1) recurring expenditures, tenant improvements and leasing costs, that are capitalized and amortized and are necessary to maintain our properties and revenue stream (excluding items contemplated prior to acquisition or associated with development / redevelopment of a property) and (2) straight line rents, then adding (3) non-real estate depreciation and amortization, (4) non-cash fair value interest expense and (5) amortization of restricted share compensation, then adding or subtracting the (6) amortization of lease intangibles, (7) real estate impairment and (8) non-cash gain/loss on extinguishment of debt, as appropriate. AFFO is included herein, because we consider it to be a performance measure of a REIT’s ability to incur and service debt and to distribute dividends to its shareholders. AFFO is a non-GAAP and non-standardized measure, and may be calculated differently by other REITs.

Core Adjusted Funds From Operations ("Core AFFO") is calculated by adjusting AFFO for the following items (which we believe are not indicative of the performance of Washington REIT’s operating portfolio and affect the comparative measurement of Washington REIT’s operating performance over time): (1) gains or losses on extinguishment of debt and gains or losses on interest rate derivatives, (2) costs related to the acquisition of properties, (3) non-share-based executive transition costs, severance expenses and other expenses related to corporate restructuring and executive retirements or resignations, (4) property impairments, casualty gains and losses, and gains or losses on sale not already excluded from FAD, as appropriate, (5) relocation expense and (6) transformation costs. These items can vary greatly from period to period, depending upon the volume of our acquisition activity and debt retirements, among other factors. We believe that by excluding these items, Core AFFO serves as a useful, supplementary performance measure of Washington REIT’s ability to incur and service debt, and distribute dividends to its shareholders. Core AFFO is a non-GAAP and non-standardized measure, and may be calculated differently by other REITs.

Core Funds From Operations (“Core FFO”) is calculated by adjusting NAREIT FFO for the following items (which we believe are not indicative of the performance of Washington REIT’s operating portfolio and affect the comparative measurement of Washington REIT’s operating performance over time): (1) gains or losses on extinguishment of debt and gains or losses on interest rate derivatives, (2) expenses related to acquisition and structuring activities, (3) executive transition costs, severance expenses and other expenses related to corporate restructuring and executive retirements or resignations, (4) property impairments, casualty gains and losses, and gains or losses on sale not already excluded from NAREIT FFO, as appropriate, (5) relocation expense and (6) transformation costs. These items can vary greatly from period to period, depending upon the volume of our acquisition activity and debt retirements, among other factors. We believe that by excluding these items, Core FFO serves as a useful, supplementary measure of Washington REIT’s ability to incur and service debt, and distribute dividends to its shareholders. Core FFO is a non-GAAP and non-standardized measure, and may be calculated differently by other REITs.

NAREIT Funds From Operations (“FFO”) is defined by 2018 National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) FFO White Paper Restatement, as net income (computed in accordance with generally accepted accounting principles (“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 equity real estate investment trusts (“REITs”) 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 FFO may not be comparable to FFO reported by other real estate investment trusts. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. NAREIT FFO is a non-GAAP measure.

Net Operating Income (“NOI”), defined as real estate rental revenue less direct real estate operating 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 or loss on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, acquisition costs, real estate impairment, casualty gain and losses and gain or loss on extinguishment of debt. NOI does not include management expenses, which consist of corporate property management costs and property management fees paid to third parties. They are the primary performance measures we use to assess the results of our operations at the property level. We also present NOI on a cash basis ("Cash NOI") which is calculated as NOI less the impact of straight-lining apartment rent concessions. We believe that each of NOI and Cash NOI is a useful performance measure because, when compared across periods, they reflect 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 and Cash NOI exclude 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 each NOI and Cash NOI as a supplement to net income, calculated in accordance with GAAP. NOI and Cash NOI do not represent net income or income from continuing operations calculated in accordance with GAAP. As such, neither should be considered an alternative to these measures as an indication of our operating performance.

Other Definitions

Average Effective Monthly Rent Per Home represents the average of effective rent (net of concessions) for in-place leases and the market rent for vacant homes.

Average Occupancy is based on average daily occupied apartment homes as a percentage of total apartment homes.

Current Strategy represents the class of each community in our portfolio based on a set of criteria. Our strategies consist of the following subcategories: Class A, Class A-, Class B Value-Add and Class B. A community's class is dependent on a variety of factors, including its vintage, site location, amenities and services, rent growth drivers and rent relative to the market.

• Class A communities are recently-developed, well-located, have competitive amenities and services and command average rental rates well above market median rents.
• Class A- communities have been developed within the past 20 years and feature operational improvements and unit upgrades and command rents at or above median market rents.
• Class B Value-Add communities are over 20 years old but feature operational improvements and strong potential for unit renovations. These communities command average rental rates below median market rents for units that have not been renovated.
• Class B communities are over 20 years old, feature operational improvements and command average rental rates below median market rents.

Debt Service Coverage Ratio is computed by dividing earnings attributable to the controlling interest before interest expense, taxes, depreciation, amortization, real estate impairment, gain on sale of real estate, gain/loss on extinguishment of debt, severance expense, relocation expense, acquisition and structuring expenses and gain/loss from non-disposal activities by interest expense (including interest expense from discontinued operations) and principal amortization.

Debt to Total Market Capitalization is total debt divided by the sum of total debt plus the market value of shares outstanding at the end of the period.

Earnings to Fixed Charges Ratio is computed by dividing earnings attributable to the controlling interest by fixed charges. For this purpose, earnings consist of income from continuing operations (or net income if there are no discontinued operations) plus fixed charges, less capitalized interest. Fixed charges consist of interest expense (excluding interest expense from discontinued operations), including amortized costs of debt issuance, plus interest costs capitalized.

Ending Occupancy is calculated as occupied homes as a percentage of total homes as of the last day of that period.

Lease Rate Growth is defined as the average percentage change in either gross (excluding the impact of concessions) or effective rent (net of concessions) for a new or renewed lease compared to the prior lease based on the move-in date. The blended rate represents the weighted average of new and renewal lease rate growth achieved.

Recurring Capital Expenditures represent non-accretive building improvements required to maintain current revenues. Recurring capital expenditures do not include acquisition capital that was taken into consideration when underwriting the purchase of a building or which are incurred to bring a building up to "operating standard".

Retention represents the percentage of leases renewed that were set to expire in the period presented.

Same-store Portfolio 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 categorize our properties as "same-store" or "non-same-store" for purposes of evaluating comparative operating performance. 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. Development properties are categorized as same-store when they have reached stabilized occupancy (90%) before the start of the prior year. We define redevelopment properties as those for which 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.

Transformation Costs include costs related to the strategic transformation including the allocation of internal costs, consulting, advisory and termination benefits.