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, 2003.
Portfolio: As of year-end, the portfolio consisted of 66 properties (29 office, 11 retail, 9 multifamily, 17 industrial/flex) totaling 9.71 million square feet. The portfolio was 90% leased.
Strategy: Regional focus with diversification by property type and conservative capital management. The company qualified as a REIT and distributed 100% of ordinary taxable income to shareholders.
Key Financial Metrics
| Metric | 2003 | 2002 | 2001 |
|---|---|---|---|
| Real Estate Rental Revenue | $163.4 million | $152.9 million | $147.3 million |
| Net Income | $44.9 million | $51.8 million | $52.4 million |
| Funds From Operations (FFO) | $80.6 million | $77.2 million | $74.3 million |
| Net Operating Income (NOI) | $115.5 million | $109.0 million | $105.6 million |
| Diluted EPS | $1.13 | $1.32 | $1.38 |
| Dividends Paid Per Share | $1.47 | $1.39 | $1.31 |
| Total Debt | $517.2 million | $402.7 million | $359.7 million |
| Cash and Equivalents | $5.5 million | $13.1 million | $26.4 million |
| Shareholders' Equity | $378.7 million | $326.2 million | $323.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenue increased 6.9% to $163.4 million, driven primarily by acquisitions in 2003 ($176.6 million investment) and 2002, which added 1.07 million square feet of rentable space.
- Net Income Decline: Net income decreased 13.4% to $44.9 million. This was primarily due to a $6.6 million increase in depreciation and amortization and a $2.2 million increase in interest expense, offsetting the revenue growth.
- Occupancy Trends: Overall economic occupancy declined from 91.1% in 2002 to 89.7% in 2003. Core property NOI decreased 1.7% due to increased vacancies in the Office, Industrial, and Multifamily sectors.
- Capital Structure: Total debt increased significantly due to the issuance of $160 million in senior unsecured notes and the assumption of mortgages on new acquisitions. The company also issued 2.2 million shares of common stock for net proceeds of approximately $63 million.
Outlook, Risks, and Management Commentary
- Market Outlook: Management expects continued economic growth in the Greater Washington region driven by federal government spending. Office rents are expected to stabilize, while retail remains strong. Industrial rents are projected to remain flat.
- Development Projects: Two ground-up development projects are underway: WRIT Rosslyn Center (224-unit apartment, completion mid-2005) and South Washington Street (mixed-use, completion early 2006). Total expected investment is $70 million.
- Liquidity and Capital Needs: The company expects significant capital requirements in 2004, including $100 million for acquisitions, $25 million for development, and $55 million to retire senior notes maturing in November 2004. Liquidity is supported by $75 million in available credit facilities and operating cash flow.
- Risks: Key risks include dependence on the local economy, lease expirations (73.5% of rentable space expires between 2004-2008), refinancing risk, and potential environmental liabilities. The company faces competition for tenants and potential increases in insurance costs.
Investor Verification Checklist
- Debt Maturities: Verify the refinancing plan for the $55 million of senior unsecured notes maturing in November 2004.
- Occupancy Rates: Monitor the trend in core property occupancy, which declined in 2003, particularly in the Office and Industrial sectors.
- Development Costs: Track actual vs. estimated costs for the WRIT Rosslyn Center and South Washington Street projects to ensure no budget overruns.
- Dividend Coverage: Confirm that cash flow from operations remains sufficient to cover the $1.47 per share dividend rate, especially given the decline in net income.
- Lease Expirations: Review the schedule of lease expirations, as 21% of rentable square footage expires in 2004, creating re-leasing risk.