Business Context and Reporting Period
Company: Washington Real Estate Investment Trust (WRIT), a self-administered equity REIT focused on the greater Washington, D.C. metro region.
Reporting Period: Fiscal year ended December 31, 2008.
Portfolio: 93 properties totaling approximately 13.4 million square feet across five segments: Office (42% of revenue), Medical Office (15%), Retail (15%), Multifamily (13%), and Industrial/Flex (15%).
Market Conditions: The Washington metro region experienced positive job growth and the lowest unemployment rate among major U.S. markets (4.1% vs. 6.5% national) in 2008, though the national recession caused softening in real estate investment sales and downward pressure on rents.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Real Estate Rental Revenue | $282.3 million | $252.7 million |
| Net Income | $32.8 million | $61.9 million |
| Net Income Per Share (Diluted) | $0.67 | $1.34 |
| Funds From Operations (FFO) | $104.4 million | $106.6 million |
| Net Operating Income (NOI) | $187.7 million | $174.3 million |
| Total Assets | $2.11 billion | $1.90 billion |
| Total Debt | $1.39 billion | $1.32 billion |
| Cash Dividends Paid Per Share | $1.72 | $1.68 |
| Portfolio Occupancy (Economic) | 92.3% | 94.5% |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenue increased 11.7% to $282.3 million, driven primarily by acquisitions and new developments ($27.7 million contribution), partially offset by higher bad debt provisions ($4.6 million vs. $2.0 million in 2007).
- Profitability Decline: Net income from continuing operations dropped 51.5% to $15.2 million. This was primarily due to a $15.3 million gain on property sales in 2008 compared to a $25.0 million gain in 2007, and a $5.0 million loss on debt extinguishment.
- Occupancy Trends: Overall economic occupancy decreased to 92.3% from 94.5%. Core portfolio occupancy declined slightly, while non-core occupancy dropped significantly due to the lease-up phase of new developments (Bennett Park, Clayborne, Dulles Station).
- Bad Debt: Provisions for doubtful accounts increased 131.8% to $4.6 million, reflecting the economic recession and a major retail tenant bankruptcy causing a $1.0 million loss.
- Capital Structure: Total debt increased to $1.39 billion. The company repaid $60 million in MOPPRS notes (incurring an $8.4 million loss) and repurchased $16 million of convertible notes (realizing a $3.5 million gain).
Guidance, Outlook, and Risks
- Outlook: Management forecasts modest economic growth for the Washington region in 2009 (1.5% GRP increase) with job growth softening. Rents are expected to remain relatively flat or face downward pressure.
- Liquidity: The company raised $184.9 million in equity during 2008. It maintains $337 million in unsecured credit facilities with $263.1 million available. Management expects to fund 2009 capital requirements ($35-40 million for portfolio investment, $19.5-50 million for acquisitions) through cash flow and credit facilities.
- Key Risks:
- Financing: Disruptions in credit markets have made unsecured debt financing virtually unavailable and increased borrowing costs.
- Tenant Solvency: Risk of further tenant bankruptcies and lease non-renewals; 67% of commercial leases expire between 2009 and 2013.
- Refinancing: Significant debt maturities require refinancing in a volatile market.
- Development: Risks associated with the lease-up of new developments (Dulles Station Phase II, 4661 Kenmore) and potential cost overruns.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with financial covenants (e.g., EBITDA to fixed charges, unencumbered asset value) given the economic downturn.
- Lease Expirations: Review the schedule of 67% of commercial leases expiring between 2009-2013 and the renewal rates (60.8% in 2008 vs. 79.9% in 2007).
- Bad Debt Reserves: Monitor the trend in provisions for doubtful accounts, which more than doubled in 2008.
- Development Lease-up: Track occupancy and rental rates for new developments (Bennett Park, Clayborne, Dulles Station) to ensure they meet pro forma assumptions.
- Refinancing Costs: Assess the impact of rising interest rates on the $1.39 billion debt portfolio, particularly the $67 million in variable-rate credit facility borrowings.