ELME

Business Context and Reporting Period

Company: Washington Real Estate Investment Trust (WRIT), a Maryland REIT focused on income-producing real estate in the Washington-Baltimore region. The portfolio includes office, retail, multifamily, and industrial/flex properties.

Reporting Period: First quarter ended March 31, 2004.

Key Activity: The company executed a $100 million acquisition plan, purchasing the 8880 Gorman Road industrial property for approximately $11.7 million in March 2004. The portfolio consists of 67 properties totaling 9.8 million net rentable square feet.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 13.9% to $44.4 million, driven primarily by acquisitions completed in 2003 (specifically four office buildings and one industrial complex) which contributed significantly to base rent and recoveries.
• Net Income: Net income remained relatively flat at $11.3 million despite revenue growth, as increased depreciation ($1.8 million increase) and interest expense ($1.5 million increase) offset higher operating income.
• NOI Performance: Consolidated NOI rose 13.0% to $30.9 million. However, core property NOI (properties owned in both periods) declined 1.2% due to a $0.5 million increase in operating expenses (utilities, maintenance) that outpaced a $0.1 million revenue increase.
• Occupancy: Overall economic occupancy improved to 90.0% from 89.3%. Office and Industrial sectors saw gains, while Multifamily and Retail sectors experienced slight declines due to renovations and market conditions.
• Debt Structure: Total debt increased due to the assumption of mortgages for 2003 acquisitions and new borrowings on credit facilities to fund the 2004 acquisition. Interest expense rose due to new senior notes issued in late 2003 and early 2003.

Outlook, Risks, and Management Commentary

• Capital Requirements: Management expects significant capital needs in 2004, including approximately $100 million for acquisitions, $25 million for development, and $18 million for portfolio investments. Additionally, $55 million in medium-term notes mature in November 2004 and are expected to be refinanced.
• Market Conditions: The regional office market showed improvement due to federal spending on defense and homeland security, though significant vacancy remains in Northern Virginia. The industrial market showed signs of recovery. The multifamily market faced pressure from new construction and vacancy.
• Liquidity: The company maintains $6.1 million in cash and $61.7 million in available credit. Management believes cash flow from operations and credit facilities will meet obligations, though they note risks related to credit rating downgrades or general economic downturns.
• Risks: Key risks include interest rate fluctuations, the economic health of the Washington-Baltimore region, tenant defaults, and the potential for uninsured losses from acts of terrorism (though partial federal reimbursement exists).

Investor Verification Checklist

• Debt Maturity Wall: Verify the refinancing strategy for the $55 million in medium-term notes maturing in November 2004.
• Core NOI Trends: Monitor the decline in core property NOI (-1.2%) to ensure rising operating expenses do not erode profitability on the existing portfolio.
• Office Vacancy: Track absorption rates in the Northern Virginia office market, where occupancy is significantly lower (87%) than the DC portfolio (97%).
• Dividend Coverage: Confirm that FFO ($21.2 million) continues to comfortably cover quarterly dividend payments ($15.6 million for the quarter) to maintain REIT status.
• Acquisition Integration: Assess the performance of the newly acquired 8880 Gorman Road property and its contribution to the industrial segment's recovery.