ELME

Business Context and Reporting Period

Company: Washington Real Estate Investment Trust (WRIT), a self-administered equity REIT focused on the Greater Washington-Baltimore region.
Reporting Period: Fiscal year ended December 31, 2002.
Portfolio: 59 properties comprising 11 retail centers, 24 office buildings, 9 multifamily buildings, and 15 industrial/flex properties. Total net rentable area is approximately 9.04 million square feet.
REIT Status: Qualified under Sections 856-860 of the Internal Revenue Code; distributed 100% of ordinary taxable income to shareholders in 2002.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenue increased 4% ($5.6 million) year-over-year, driven by a 24% increase in retail center revenue and 9% in industrial/flex revenue. This offset a 2% decline in office building revenue.
• Occupancy Decline: Overall portfolio occupancy dropped from 97% in 2001 to 92% in 2002. Office occupancy fell significantly to 89% (from 97%), primarily due to 156,000 square feet of vacant space at 7900 Westpark Drive.
• Acquisitions and Dispositions: Acquired three properties in 2002 for $58.1 million (including Centre at Hagerstown and The Atrium Building). Sold one industrial property (1501 South Capitol Street) for net proceeds of $5.8 million, resulting in a $3.8 million gain.
• Expense Increases: Real estate operating expenses rose to $43.9 million (29% of revenue) due to higher property taxes and insurance premiums (up 31% in 2002). Interest expense increased to $27.8 million due to higher line of credit balances.
• Capital Improvements: Increased significantly to $25.1 million in 2002 from $14.0 million in 2001, including $11.6 million for expansions and major renovations.

Guidance, Outlook, and Risks

Management Outlook:

• Expects federal government spending to continue driving regional economic growth in 2003.
• Anticipates office rents will stabilize in D.C. and Suburban Maryland but may continue to decline in outer regions like the Dulles Corridor.
• Projects overall office vacancy to remain in the 11% range over the next two years.
• Plans to refinance $50.8 million in lines of credit maturing in 2004/2005 via share offerings or long-term debt.

Risks and Contingencies:

• Concentration Risk: 100% of properties are located in the Greater Washington-Baltimore region; 7900 Westpark Drive alone represents 11% of total real estate assets.
• Refinancing Risk: Significant reliance on lines of credit ($50.8 million outstanding) which must be refinanced or repaid in 2004/2005.
• Development Risk: New ground-up development of "WRIT Rosslyn Center" (expected completion mid-2005) introduces construction cost and leasing risks.
• Accounting Change: Dismissed Arthur Andersen LLP in April 2002; Ernst & Young LLP engaged to re-audit 2000 and 2001 financial statements.

Investor Verification Checklist

• Refinancing Strategy: Verify the specific terms and availability of capital to refinance the $50.8 million in lines of credit maturing in 2004 and 2005.
• 7900 Westpark Drive: Assess the leasing strategy and timeline for the 149,500 square feet of remaining vacancy at this major asset.
• Insurance Costs: Monitor the impact of rising insurance premiums (up 31% in 2002) on future operating margins.
• Development Progress: Track the budget and schedule for the WRIT Rosslyn Center development project.
• REIT Compliance: Confirm continued qualification as a REIT to maintain tax-advantaged status.