Business Context and Reporting Period
Company: Washington Real Estate Investment Trust (WRIT), a self-administered equity REIT focused on the greater Washington metropolitan region.
Reporting Period: Fiscal year ended December 31, 2006.
Portfolio: 82 properties comprising 11.8 million net rentable square feet across five sectors: general purpose office (40% of revenue), medical office (11%), retail (17%), multifamily (15%), and industrial/flex (17%).
Strategy: Regional focus with a diversified portfolio. The company owns, develops, and manages income-producing real estate. No properties were disposed of in 2006.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Real Estate Rental Revenue | $219.7 million | $190.0 million |
| Net Income | $38.7 million | $77.6 million |
| Income from Continuing Operations | $38.7 million | $40.4 million |
| Funds From Operations (FFO) | $92.8 million | $87.4 million |
| Net Operating Income (NOI) | $152.4 million | $131.9 million |
| Total Assets | $1.53 billion | $1.14 billion |
| Total Debt | $1.03 billion | $712.2 million |
| Shareholders' Equity | $441.9 million | $380.3 million |
| Cash Flow from Operations | $86.3 million | $87.5 million |
| Dividends Paid Per Share | $1.64 | $1.60 |
Note: 2005 Net Income included a $37.0 million gain on property dispositions classified as discontinued operations. 2006 had no discontinued operations.
Material Changes vs. Prior Period
- Revenue Growth: Rental revenue increased 15.6% to $219.7 million, driven primarily by acquisitions completed in 2005 and 2006 ($17.9 million impact) and core portfolio performance.
- Net Income Decline: Net income decreased 50% to $38.7 million. This decline is largely due to the absence of the $37.0 million gain on property sales recorded in 2005. Income from continuing operations remained relatively stable, decreasing only 4.4%.
- Acquisitions: The company acquired 14 properties in 2006 for approximately $303 million (contract price), including six medical office buildings, three office buildings, three industrial properties, and two retail centers.
- Debt Expansion: Total debt increased significantly to $1.03 billion from $712 million to fund acquisitions and development. This included the issuance of $150 million in 5.95% senior unsecured notes and $110 million in 3.875% senior convertible notes.
- Occupancy: Overall economic occupancy improved to 93.7% in 2006 from 92.3% in 2005. Office sector occupancy rose significantly to 92.1%.
Guidance, Outlook, and Risks
Outlook and Capital Requirements: Management expects significant capital requirements in 2007, including approximately $150 million for property acquisitions, $64 million for development projects (Bennett Park, Clayborne Apartments, Dulles Station), and $44 million for portfolio investments. The company anticipates funding these through cash flow from operations, credit facilities, and potential equity/debt offerings.
Management Commentary: The Washington metro region economy remained strong in 2006 with low unemployment (3.0%) and job growth in professional services. The company completed the redevelopment of Shoppes at Foxchase and continued ground-up development on three major projects.
Risks and Contingencies:
- Geographic Concentration: All properties are located in the Washington metro region, exposing the company to local economic downturns and federal spending fluctuations.
- Development Risk: New ground-up development projects face risks regarding construction costs, financing availability, and lease-up rates.
- Debt Refinancing: The company relies on borrowings for acquisitions and development. Rising interest rates or inability to refinance maturing debt could adversely affect cash flow.
- Lease Expirations: Approximately 69% of commercial leased square footage is scheduled to expire between 2007 and 2011.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants on the $270 million unsecured credit facilities and senior notes, specifically debt service coverage and unencumbered asset ratios.
- Development Progress: Monitor the completion timelines and lease-up rates for the three major development projects (Bennett Park, Clayborne Apartments, Dulles Station) expected to finish in 2007.
- Lease Renewals: Track renewal rates for the 11% of commercial leases expiring in 2007 to assess revenue stability.
- Interest Rate Exposure: Assess the impact of rising interest rates on the $61 million in variable-rate lines of credit and future refinancing costs.
- FFO vs. Net Income: Continue to monitor Funds From Operations ($92.8 million) as the primary performance metric, given the volatility of Net Income due to property sales.