Business Context and Reporting Period
Company: Washington Real Estate Investment Trust (WRIT), a self-administered equity REIT focused on the greater Washington metro region.
Reporting Period: Fiscal year ended December 31, 2007.
Portfolio: 89 properties comprising office, medical office, retail, multifamily, and industrial/flex assets totaling approximately 12.8 million net rentable square feet. The portfolio was 97% leased as of year-end.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Real Estate Rental Revenue | $255.7 million | $208.7 million |
| Net Income | $61.9 million | $38.7 million |
| Net Operating Income (NOI) | $175.7 million | $145.5 million |
| Funds From Operations (FFO) | $106.6 million | $92.8 million |
| Diluted EPS | $1.34 | $0.88 |
| Total Debt | $1.325 billion | $1.018 billion |
| Cash Flow from Operations | $115.5 million | $86.5 million |
| Dividends Paid Per Share | $1.68 | $1.64 |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenue increased 22.5% to $255.7 million, driven primarily by acquisitions in 2006 and 2007 ($31.6 million impact) and core portfolio performance.
- Acquisitions: Acquired 9 properties in 2007 (3 office, 4 medical office, 1 industrial, 1 land) for approximately $319.3 million. Significant 2006 acquisitions also contributed to 2007 results.
- Dispositions: Sold Maryland Trade Centers I and II for $58.0 million, recognizing a $25.0 million gain. Two additional properties (Sullyfield Center and The Earhart Building) were classified as held for sale.
- Debt Structure: Total debt increased significantly due to the issuance of $150.0 million in 3.875% convertible senior notes and increased utilization of credit facilities to fund acquisitions and development.
- Development: Completed Phase I of Dulles Station (office) and the majority of Bennett Park (multifamily). The Clayborne Apartments began delivery in early 2008.
Guidance, Outlook, and Risks
- Outlook: Management expects modest economic growth in the Washington metro region for 2008. Office vacancy is projected to increase to 11.3% regionally due to new supply, though WRIT's office portfolio remains at 96.7% leased.
- Capital Requirements: Anticipated 2008 capital needs include approximately $100-$120 million for acquisitions, $35.1 million for portfolio investments, and $12.4 million for development.
- Dividend Policy: The company intends to maintain its REIT status by distributing 90% of taxable income. Dividends were increased to $1.68 per share in 2007.
- Risks:
- Geographic Concentration: All properties are in the Washington metro region, exposing the company to local economic downturns and federal spending changes.
- Debt Refinancing: Significant debt maturities and reliance on credit markets; rising interest rates could increase costs on variable-rate debt.
- Development Risk: Ground-up development projects (Bennett Park, Clayborne, Dulles Station) face construction cost overruns and leasing uncertainties.
- Lease Expirations: Approximately 68% of commercial leased square footage expires between 2008 and 2012.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants on unsecured credit facilities and senior notes, particularly regarding debt-to-assets and debt service coverage ratios.
- Development Progress: Monitor leasing rates and occupancy for newly completed developments (Bennett Park, Dulles Station) to ensure they meet projected cash flow targets.
- Refinancing Costs: Assess the impact of the $60 million MOPPRS note repayment and subsequent refinancing costs incurred in Q1 2008.
- Lease Renewals: Track renewal rates and rental rate concessions for the 13% of commercial leases expiring in 2008.
- REIT Compliance: Confirm that dividend distributions continue to meet the 90% taxable income requirement to maintain tax-advantaged status.