Washington Real Estate Investment Trust Annual Report 2001

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FY2001 Annual Report · Washington Real Estate Investment Trust

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WASHINGTON REAL ESTATE
INVESTMENT TRUST

6110 Executive Boulevard

Rockville, Maryland 20852-3927

301-984-9400

800-565-9748

Fax: 301-984-9610

w w w. w r i t . c o m

The graph on the front cover

reflects the total return (dividends plus

price appreciation with all dividends

reinvested) of WRIT, the S&P 500,

the Morgan Stanley REIT Index, the

NASDAQ and the DOW for the period

beginning December 31, 1971, and

ending December 31, 2001.

COMPARE WRIT’S PERFORMANCE
WITH OTHER INDUSTRY LEADERS

$10,000 invested in WRIT since

1971, with dividends reinvested,

would be worth $1,789,000 as

of December 31, 2001.

W R I T $ 1 , 7 8 8 , 7 0 1

S & P 5 0 0 $ 3 4 6 , 2 4 4

R E I T I N D U S T R Y $ 4 0 0 , 3 8 8

N A S D A Q $ 1 9 5 , 0 4 0

D 0 W $ 1 1 9 , 4 5 9

COMPOUND ANNUAL
RATES OF RETURN:

W R I T 1 8 . 2 %

S & P 5 0 0 1 2 . 1 %

R E I T I N D U S T R Y 1 2 . 6 %

N A S D A Q 1 0 . 1 %

D 0 W 8 . 3 %

COMPARATIVE RETURNS OVER 30-YEAR PERIOD

W R I T

S & P 5 0 0

R E I T I N D U S T R Y

D O W

N A S D A Q

W A S H I N G T O N R E A L E S T A T E I N V E S T M E N T T R U S T

ANNUAL REPORT 2001

VALUE 36 consecutive years of

increased earnings per share

GROWTH 31 consecutive years

of increased dividends per share

PERFORMANCE 29 consecutive

years of increased funds from

operations per share

W R I T

S & P 5 0 0

R E I T I N D U S T R Y

N A S D A Q

D O W

FUNDS FROM OPERATIONS
PER SHARE

Washington Real Estate Investment Trust, founded

MISSION STATEMENT

2 0 0 1 $ 1 . 9 6

2 0 0 0 $ 1 . 7 9

1 9 9 9 $ 1 . 5 7

1 9 9 8 $ 1 . 3 9

1 9 9 7 $ 1 . 2 3

CASH DIVIDENDS PAID
PER SHARE

2 0 0 1 $ 1 . 3 1

2 0 0 0

$ 1 . 2 3

1 9 9 9

$ 1 . 1 6

1 9 9 8

$ 1 . 1 1

1 9 9 7

$ 1 . 0 7

in 1960 and headquar tered in Rockville, Mar yland,

invests in a diversified range of income-producing property

types. Our purpose is to acquire and manage real estate

investments in markets we know well and protect our

assets from single proper ty-type value fluctuations

through diversified holdings. Our goal is to continue

to safely increase earnings and shareholder value.

SELECTED FINANCIAL AND OPERATING DATA
IN MILLIONS, EXCEPT FULLY DILUTED PER SHARE AMOUNTS

F O R T H E Y E A R
Real Estate Revenue
Income before Gain

on Sale of Real Estate

Net Income
Funds from Operations
Cash Dividends Paid
Average Shares Outstanding

Net Income
Funds from Operations
Cash Dividends Paid

A T Y E A R E N D
Total Assets
Total Debt
Shareholders’ Equity

2001

2000

1999

1998

1997

$ 148

$ 135

$ 119

$ 104

$ 79

48
52
74
50
39

42
45
64
44
36

$1.27
1.38
1.96
1.31

$1.16
1.26
1.79
1.23

$ 708
360
324

$ 632
351
259

36
44
56
41
36

$1.02
1.24
1.57
1.16

$ 608
330
257

34
41
50
40
36

$ .96
1.15
1.39
1.11

$ 559
283
254

30
30
41
36
33

$ .90
.90
1.23
1.07

$ 469
203
252

P E R F U L L Y D I L U T E D C O M M O N S H A R E
Income before Gain
on Real Estate

WRIT trustees and officers

TRUSTEES

Edmund B. Cronin, Jr.

Chairman, President and
Chief Executive Officer
Director, John J. Kirlin
Companies; Potomac Electric
Power Company

John M. Derrick, Jr.

Chairman and Chief Executive
Officer, Potomac Electric
Power Company

Clifford M. Kendall

Director, Affiliated
Computer Service, Inc.;
VSE Corporation;
Onsite Sourcing, Inc.

John P. McDaniel

Chief Executive Officer,
MedStar Health
Director, AAL/Lutheran
Brotherhood

Charles T. Nason

Chairman and Chief Executive
Officer, Acacia Life Insurance

David M. Osnos

Senior Partner, Arent Fox
Kintner Plotkin & Kahn;
Director, EastGroup Properties;
VSE Corporation

Susan J. Williams

Chief Executive Officer
and President,
Williams Aron & Associates

OFFICERS

Edmund B. Cronin, Jr.

Chairman, President and
Chief Executive Officer

George F. McKenzie

Senior Vice President,
Real Estate

Brian J. Fitzgerald

Managing Director,
Leasing

Laura M. Franklin

Managing Director,
Accounting and Administration,
Corporate Secretary

Sara L. Grootwassink

Managing Director,
Finance and Capital Markets

Kenneth C. Reed

Managing Director,
Property Management

Thomas L. Regnell

Managing Director,
Acquisitions

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Clockwise from rear left: Charles T. Nason, Susan J. Williams, Clifford M. Kendall, John P. McDaniel, John M. Derrick Jr.,
Edmund B. Cronin Jr., David M. Osnos

Clockwise from rear left: Kenneth C. Reed, Sara L. Grootwassink, Brian J. Fitzgerald, Laura M. Franklin,
Thomas L. Regnell, Edmund B. Cronin Jr., George F. McKenzie

TO OUR SHAREHOLDERS

What a year! The high-technology implo-

management has not applied any

ways to demonstrate performance,

sion, major national retail chains filing

undue pressure on Arthur Andersen to

usually through financial engineering.

for bankruptcy, September 11, 2001,

take unusually aggressive positions.

Often it is through off-balance sheet

continued decline in the economy,

Arthur Andersen has been our

transactions and trading cover-ups.

international unrest, poor earnings

auditor since 1996. Prior to that time,

WRIT has no off-balance sheet transac-

reports with guarded future guidance,

Price Waterhouse, now known as PWC,

tions or technology ventures, nor are

all topped off with the Enron affair.

was our auditor. We changed auditors

we in a trading business. So what you

WRIT has weathered this storm

because PWC moved both their real

see in our reporting is real. Unless

quite well. Our total return for the year

estate audit and tax groups to Atlanta,

there is some new definitive reason to

was 11.25%. But WRIT also has been

Georgia. During PWC’s relocation,

sever the relationship, WRIT plans to

negatively affected by the declining

WRIT was assigned local PWC audit

keep Arthur Andersen as its auditor. In

economy. It slowed our growth from

personnel unfamiliar with real estate

the meantime, WRIT is pursuing a con-

high double-digit earnings and funds

with assistance from the new head real

tingency plan.

from operations per share to a very

estate office in Atlanta. We found that

Similar to many professional

respectable 9.5% increase over the

arrangement unacceptable.

economists, I expect that sometime

year 2000. Our financial statement

Consequently, we invited four of

in the late third quarter and into the

continues to be one of the strongest

the Big Five accounting firms, including

fourth quarter of 2002 we should begin

in the industry. WRIT continues to

PWC, to bid for our business. Both

seeing a real recovery. Our diversified

retain an A- and Baa1 rating from

the Audit Committee and management

portfolio will continue to serve us well.

Standard & Poor’s and Moody’s,

were involved in the process. We

It will enable us to continue to extend

respectively. I feel very comfortable

compared the firms by using a matrix

our record of 36 consecutive years of

that our geographic focus in the

developed by WRIT, which included

increased earnings per share, 31 con-

Washington-Baltimore region, property-

critical real estate and, in particular,

secutive years of increased dividends

type diversification, and solid balance

REIT criteria. The result of several

per share, and 29 years of increased

sheet will enable us to continue in

presentations and meetings with each

funds from operations per share.

2002 to grow our earnings and divi-

of the firms led us to choose Arthur

Please read the following pages

dends in spite of the soft economy.

Andersen. WRIT has been very satis-

to become better acquainted with your

The recent Enron event has led to

fied with the partners and associates

company regarding its properties and

increased concern about accounting

assigned to us.

financial performance.

practices and reliable earnings reports.

Until recently, Arthur Andersen has

Since Arthur Andersen, Enron’s auditor,

enjoyed an impeccable reputation,

Sincerely,

is our auditor, your Trustees and Audit

although from time to time they, like

Committee have had in-depth discus-

the other large national or international

sions with Andersen’s senior managers

auditing firms, have been cited and,

about the Enron affair and its implica-

indeed, fined for failure to properly

Edmund B. Cronin, Jr.

tions for WRIT. I can assure you, as

perform. The root of the problem

Chairman of the Board,

Arthur Andersen told the Trustees, that

begins with management seeking out

President and Chief Executive Officer

Bradlee Shopping Center

Courthouse Square

1700 Research Boulevard

the results:
year after year of performance

1 9 9 9

W R I T 1 2 . 9 %

R E I T

1 0 . 2 %

2 0 0 0

W R I T 1 4 . 6 %

R E I T

7 . 1 %

WRIT VS. REIT INDUSTRY
FFO PER SHARE GROWTH
1999–2001

FFO per share growth is the most widely recog-

nized earnings performance measure in the

REIT industry. As reflected in the accompanying

graph, WRIT has outperformed industry average

FFO per share growth by 616 basis points over

the last three years. The extent of WRIT’s out-

performance has increased in each of the last

three years. WRIT’s average 12.3% FFO per

share growth over the last three years is one

2 0 0 1

W R I T 9 . 5 %

R E I T

1 . 2 %

SOURCE: NAREIT

of the highest in the industry.

RATIO OF OPERATING EXPENSES
AND G&A TO REVENUE

WRIT’s ability to achieve its performance goals

includes proactively managing its operating

expenses and G&A without diminishing quality

service to its tenants. The result, as the

accompanying chart demonstrates, is that

the ratio of operating expenses and G&A to

revenue continues to improve.

1 9 9 7

3 7 . 4 %

1 9 9 8

3 6 . 4 %

1 9 9 9

3 4 . 9 %

2 0 0 0

3 4 . 0 %

2 0 0 1 3 2 . 5 %

Dulles South IV

3801 Connecticut Avenue

600 Jefferson Plaza

RETURN ON INVESTED CAPITAL

W R I T 1 2 . 3 %

In all businesses, return on invested

R E I T I N D U S T R Y 1 0 . 0 %

capital (ROIC) is an extremely important

measure of company performance.

R E TA I L

9 . 7 %

I N D U S T R I A L

9 . 7 %

WRIT’s extraordinary performance is

M U LT I - FA M I LY

9 . 4 %

a result of the effective deployment of

O F F I C E

9 . 0 %

capital combined with hands-on manage-

ment, leasing, and a value-added focus.

WRIT’s average 12.3% ROIC ranks fourth

out of the 73 companies studied over

the 19-quarter period. Over the past

eight quarters, WRIT ranks second out

of 106 companies.

PROPERTY-TYPE DIVERSIFICATION

The Greater Washington regional economy is

unique, anchored by the very significant federal

government presence. With the federal government

stability driving continued private sector growth,

the region can expect to experience one of the

most favorable economic environments in the

United States. Owning a diversified property-type

portfolio enables WRIT to focus on the Greater

Washington region without the concerns of single

property-type owners regarding asset concentration

and value fluctuations.

QUARTER AVERAGES FROM FIRST QUARTER 1997

TO THIRD QUARTER 2001

SOURCE: CREDIT SUISSE FIRST BOSTON

1 7 %
M U LT I - FA M I LY

1 4 %
R E TA I L

1 5 %
I N D U S T R I A L / F L E X

4 %
M E D I C A L O F F I C E

2001 NET OPERATING INCOME

CONTRIBUTION BY PROPERTY TYPE

5 0 %
O F F I C E

Tycon Plaza III

The Earhart Building

The Ashby Apartments

the strategy:
disciplined asset management

ACQUISITIONS

One Central Plaza is a 12-story, 274,000-square-foot

building containing eight levels of office space and four levels

of parking, located at 11300 Rockville Pike in Montgomery

County, MD. It is located in the heart of the county across from

White Flint Mall, two blocks from the White Flint Metro Station

and the Nuclear Regulatory Commission, and within one mile of

the National Naval Medical Hospital and the National Institutes

of Health. At the time of acquisition, the property was 99.9%

occupied by 62 tenants, a definite WRIT profile property with

its small tenant base and an “A” location.

One Central Plaza

WRIT paid $44.4 million or $162.04 per square foot for the building, which was below

replacement cost. The initial fiscal year 2002 yield is projected to be 10.4%. In addition to

synergies with other properties WRIT owns nearby, substantial upside in rents is expected

as both parking and office rental rates are below the current market.

Sullyfield Commerce Center is comprised of two one-story with

mezzanine flex warehouse buildings containing 248,000 square feet.

The property is located at 14320–14370 Sullyfield Circle, Chantilly, VA.

The acquisition price was $21.6 million or $87.10 per square foot.

This property complements other properties WRIT owns within the

Sullyfield Business Park. With this acquisition, WRIT now owns

426,457 square feet in this 1.7-million-square-foot business park.

At acquisition, the property was 100% occupied by nine tenants.

The average in-place rents of those tenants expiring through 2005

are estimated to be 27% below market. Initial fiscal year 2002 yield

Sullyfield Commerce Center

is expected to be 10.3%.

7900 Westpark Drive

Maryland Trade Center

800 Block of South Washington

DISPOSITIONS

In 2001, WRIT sold its former headquarters at 10400 Connecticut Avenue in

Kensington, MD, for $8,400,000. This sale resulted in a net gain of $4,296,000.

Since the commencement of WRIT’s asset disposition program in 1998, WRIT

has sold 10 properties. In each case, the sale proceeds were reinvested, on a

tax-deferred basis, into properties that management believes will have substan-

tially stronger earnings potential in line with WRIT’s long-term objectives.

10400 Connecticut Avenue

4 0 %
R E C U R R I N G C A P I TA L
I M P R O V E M E N T S 1

2 9 %
T E N A N T
I M P R O V E M E N T S 2

6 %
E X PA N S I O N S &
M A J O R R E N O VAT I O N S 2

2 5 %
A C Q U I S I T I O N - R E L AT E D 2

1 NON-ACCRETIVE

2 ACCRETIVE

CAPITAL EXPENDITURES

There are four components to WRIT’s capital improve-

ment expenditures. Acquisition-related—when acquiring

assets, as part of WRIT’s total acquisition price an

additional investment is expected for replacement of

building components, for example, a new roof or other

major replacement needs and deferred maintenance.

Tenant improvements—generally when a tenant renews

or a new tenant commits for space, improvements to

the space is expected to be paid by WRIT. Expansions

and major renovations—capital expenditures for new

construction, new facades, the retrofit of elevators and

lobbies, and other major projects. Recurring capital

improvements—the combination of many smaller

capital expenditure items that must be spent to keep

the properties in first-class operating condition to meet

tenant expectations.

Capital improvement expenditures are considered

either accretive or non-accretive. Although they both

add value to a property over its lifetime, current income

may not increase in the short term. For investment

analysis purposes, it is necessar y to identify the

accretive versus the non-accretive capital expenditures.

Northern Virginia

Washington, D.C.

the portfolio:
strong real estate markets

MARYLAND

WASHINGTON, D.C.

VIRGINIA

Maryland Suburban Technology Corridors

multi-family

1 Roosevelt Towers

Falls Church, Virginia

2 Park Adams

Arlington, Virginia
3 Munson Hill Towers
Falls Church, Virginia

retail centers

1 Takoma Park Shopping Center

Takoma Park, Maryland
2 Westminster Shopping Center

Westminster, Maryland

3 Concord Centre

Springfield, Virginia

4 Wheaton Park Shopping Center

Wheaton, Maryland

4 Country Club Towers
Arlington, Virginia

5 3801 Connecticut Avenue, NW

Washington, D.C.

6 Walker House Apartments
Gaithersburg, Maryland

7 The Ashby at McLean
McLean, Virginia

8 Bethesda Hill Apartments
Bethesda, Maryland
9 Avondale Apartments
Laurel, Maryland

5 Bradlee Shopping Center
Alexandria, Virginia
6 Chevy Chase Metro Plaza

Washington, D.C.

7 Montgomery Village Center
Gaithersburg, Maryland
8 The Shoppes of Foxchase

Alexandria, Virginia

9 Frederick County Square
Frederick, Maryland

10 The 800 Block of

South Washington Street
Alexandria, Virginia

office buildings

1 1901 Pennsylvania Avenue, N.W.

9 Tycon III

Washington, D.C.
2 51 Monroe Street
Rockville, Maryland
3 7700 Leesburg Pike

Tysons Corner, Virginia

4 515 King Street

Alexandria, Virginia
5 The Saratoga Building
Rockville, Maryland
6 The Lexington Building
Rockville, Maryland
7 Brandywine Center
Rockville, Maryland

8 Tycon II

Tysons Corner, Virginia
10 6110 Executive Boulevard
Rockville, Maryland
11 1220 19th Street, NW
Washington, D.C.
12 Maryland Trade Center I
Greenbelt, Maryland
13 Maryland Trade Center II
Greenbelt, Maryland
14 1600 Wilson Boulevard
Arlington, Virginia
15 7900 Westpark Drive

Tysons Corner, Virginia
16 Woodburn Medical Park I & II

Tysons Corner, Virginia

Fairfax, Virginia

industrial/flex properties

17 8230 Boone Boulevard
Tysons Corner, Virginia

18 600 Jefferson Plaza
Rockville, Maryland
19 1700 Research Boulevard
Rockville, Maryland
20 11821 Parklawn Drive
Rockville, Maryland

21 Wayne Plaza

Silver Spring, Maryland

22 Courthouse Square
Alexandria, Virginia
23 One Central Plaza
Rockville, Maryland

1 Capital Freeway Center

Washington, D.C. (sold 2/02)

2 Fullerton Industrial Park
Springfield, Virginia

7 Alban Business Center
Springfield, Virginia
8 The Earhart Building
Chantilly, Virginia

13 8900 Telegraph Road
Lorton, Virginia
14 Dulles South IV
Chantilly, Virginia

3 Pepsi-Cola Distribution Center

9 Ammendale Technology Park I

15 Sully Square

Forestville, Maryland

Beltsville, Maryland

Chantilly, Virginia

4 Charleston Business Center

10 Ammendale Technology Park II

16 Sullyfield Commerce Center

Rockville, Maryland
5 Tech 100 Industrial Park
Elkridge, Maryland

Beltsville, Maryland
11 Pickett Industrial Park
Alexandria, Virginia

6 Crossroads Distribution Center

12 Northern Virginia Industrial Park

Elkridge, Maryland

Lorton, Virginia

Chantilly, Virginia

the future:
opportunities for adding value

Value is not created through acquisitions alone. There must be opportunities to add value through creative

thinking. With each new acquisition and the constant review of existing properties, WRIT looks for added-

value opportunities through the use of excess density or favorable code modifications.

1901 PENNSYLVANIA AVENUE, NW

Facade renovation (new curtain wall)

98,000 square feet

Completion expected May 2002

WRIT ROSSLYN CENTER

Use of excess density

211 apartments/10 townhouses

Completion expected late 2004

WESTMINSTER SHOPPING CENTER

Renovation and re-tenanting

146,000 square feet

Completion expected May 2002

WALKER HOUSE

Mechanical building conversion

14 apartments

Completion expected 2004

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

WRIT’s discussion and analysis of its financial condition and results of

operations are based upon WRIT’s consolidated financial statements,

which have been prepared in accordance with accounting principles

RESULTS OF OPERATIONS
Real Estate Rental Revenue: 2001 Versus 2000
Total revenues for 2001 increased $13.7 million, or 10%, to $148.4 mil-

generally accepted in the United States. The preparation of these

lion from $134.7 million in 2000. The percentage increase in real estate

financial statements requires WRIT to make estimates and judgments

rental revenue from 2000 to 2001 by property type was as follows:

that affect the reported amounts of assets, liabilities, revenues and

expenses. On an on-going basis, WRIT evaluates the company’s esti-

mates, including those related to estimated useful lives of real estate

assets, cost reimbursement income, bad debts, contingencies and

litigation. WRIT bases the company’s estimates on historical experience

and on various other assumptions that are believed to be reasonable

under the circumstances, the results of which form the basis for

making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. There can be no

assurance that actual results will not differ from those estimates.

CRITICAL ACCOUNTING POLICIES
WRIT believes the following critical accounting policies affect the

company’s more significant judgments and estimates used in the

preparation of the company’s consolidated financial statements.

WRIT’s significant accounting policies are described in Note 1 in the

Notes to the Consolidated Financial Statements.

Revenue Recognition
WRIT’s revenue recognition policy is significant because revenue is a key

Office Buildings
Retail Centers
Multifamily
Industrial/Flex Properties

14%
5%
5%
8%

During 2001, WRIT’s office building revenues and operating

income increased by 14% and 15%, respectively, over 2000. These

increases were primarily due to the 2001 acquisition of One Central

Plaza and 2000 acquisitions of Wayne Plaza and Courthouse Square

combined with increased rental rates for the sector, offset in part

by the 2001 sale of 10400 Connecticut Avenue. 3.5% of the real estate

portfolio revenues are attributable to WRIT’s medical office buildings,

which WRIT considers to have less exposure to economic trends than

typical office buildings. Occupancy levels remained relatively unchanged.

Revenues and operating income in WRIT’s core group of office

buildings (excluding 2001 and 2000 acquisitions and dispositions)

increased 4% and 5%, respectively, from 2000 to 2001. The increases

in revenue and operating income were a result of strong rental rate

growth throughout the sector. WRIT’s office markets are strong and,

while there is a significant amount of office development underway

component of the company’s results from operations. In addition, revenue

in several submarkets, management anticipates that this sector will

recognition determines the timing of certain expenses, such as leasing

continue to perform well in 2002. Economic occupancy rates for the

commissions and bad debt. WRIT recognizes real estate rental revenue

core group of office buildings averaged 98% for 2001 and 97% for

including cost reimbursement income when earned in accordance with

2000. Economic occupancy is defined as gross rental revenue less

SFAS 13, “Accounting for Leases”. This requires WRIT to recognize

vacancy losses.

rental revenue on a straight-line basis over the term of the company’s

Rental rate increases of 4% for the core group of office buildings

leases. WRIT maintains an allowance for doubtful accounts for esti-

were the result of increases at nearly all of the properties. During 2001,

mated losses resulting from the inability of the company’s tenants to

WRIT executed new leases for 515,000 square feet of office space at

make required payments.

Estimated Useful Lives of Real Estate Assets
Real estate assets are depreciated on a straight-line basis over estimated

useful lives not exceeding 50 years. All capital improvement expenditures

associated with replacements, improvements, or major repairs to real

property are depreciated using the straight-line method over their esti-

mated useful lives ranging from 3 to 30 years. All tenant improvements

are amortized over the shorter of the useful life or the term of the lease.

Maintenance and repair costs are charged to expense as incurred.

Impairment Losses on Long-Lived Assets
WRIT recognizes impairment losses on long-lived assets used in

an average face rent increase of 18% on a non-straight line basis.

During 2001, WRIT’s retail center revenues and operating income

increased by 5% and 6%, respectively, over 2000. The change was

primarily attributable to increased rental rates across the sector offset

in part by the 2000 sales of Prince William Plaza and Clairmont retail

center. Occupancy levels remained relatively unchanged.

Retail center revenue and operating income in WRIT’s core

retail centers (excluding 2001 and 2000 acquisitions and disposi-

tions) increased 7% and 8%, respectively, from 2000 to 2001 due

primarily to the 8% growth in retail center rental rates for this

same group.

Rental rate increases of 8% for the core group of retail centers

operations when indicators of impairment are present and the net

were the result of increases at the majority of the properties. During

undiscounted cash flows estimated to be generated by those assets

2001, WRIT executed new leases for 188,000 square feet of retail

are less than the assets’ carrying amount. If such carrying amount

space at an average face rent increase of 64% on a non-straight

is in excess of the estimated projected operating cash flows of the

line basis.

property, WRIT would recognize an impairment loss equivalent to an

WRIT’s multifamily revenues and operating income increased by

amount required to adjust the carrying amount to the estimated fair
market value. There were no property impairments recognized during

5% and 4%, respectively, in 2001 over 2000. These increases were
primarily due to increased rental rates offset by declining occupancy

the three-year period ending December 31, 2001.

levels across the sector.

WRIT’s multifamily sector core group revenues and operating

with increased rental rates and occupancy levels, offset by the 2000

income increased 4% and 6%, respectively. These increases were the

sales of Prince William Plaza and Clairmont Center.

result of the 7% rental rate increase throughout the group. Economic

Revenues and operating income in WRIT’s core retail centers

occupancy rates for the core group of multifamily averaged 95% in

(excluding 2000 and 1999 acquisitions and dispositions) increased

2001 and 97% in 2000.

4% and 8%, respectively, from 1999 to 2000 due to increased rental

WRIT’s industrial/flex property revenues and operating income

rate growth. Retail center rental rates for this same group increased

increased by 8% and 6%, respectively, in 2001 over 2000. These

5% in 2000 over 1999.

increases were primarily due to the 2001 acquisitions of Sullyfield

Rental rate increases of 5% for the core group of retail centers

Commerce Center as well as increased rental rates and occupancy

were the result of increases at the majority of the properties. During

levels across the sector.

2000, WRIT executed new leases for 181,000 square feet of retail

Revenues and operating income in WRIT’s core group of industrial/

space at an average face rent increase of 15% on a non-straight

flex properties (excluding 2001 and 2000 acquisitions and dispositions)

line basis.

increased 6% and 8%, respectively, from 2000 to 2001 as a result of
rental rate growth and higher occupancy levels in 2001 compared to

WRIT’s multifamily revenues and operating income increased by

14% and 19%, respectively, in 2000 over 1999. These increases were

2000. Economic occupancy rates for the core group of industrial proper-

primarily due to the 1999 acquisition of Avondale Apartments, combined

ties averaged 98% in 2001 compared to 97% in 2000.

with increased rental rates and occupancy levels across the sector.

Rental rate increases of 6% for the core group of industrial/flex

WRIT’s multifamily sector core group revenues and operating

centers were the result of increases at the majority of the centers.

income (excluding the Avondale Apartments acquired in 1999)

During 2001, WRIT executed new leases for 451,000 square feet of

increased 7% and 11%, respectively. These increases were the result

industrial space leases at an average face rent increase of 9.3% on

of the 6% rental rate increase throughout the group. Economic occu-

a non-straight line basis.

pancy rates for the core group of multifamily averaged 97% in both

Real Estate Rental Revenue: 2000 Versus 1999
Total revenues for 2000 increased $15.8 million, or 13%, to $134.7 mil-

lion from $119.0 million in 1999. The percentage increase in real estate

rental revenue from 1999 to 2000 by property type was as follows:

Office Buildings
Retail Centers
Multifamily
Industrial/Flex Properties

15%
1%
14%
19%

2000 and 1999.

WRIT’s industrial/flex property revenues and operating income

increased by 19% and 21%, respectively, in 2000 over 1999. These

increases were primarily due to the 1999 acquisitions of Dulles

South IV, Amvax and Sully Square, as well as increased rental rates and

occupancy levels primarily at Nor thern Virginia Industrial Park, offset

in part by the loss of revenues from the 1999 sales of the Department

of Commerce Industrial Center and V Street Distribution Center.

Revenues and operating income in WRIT’s core group of industrial/

During 2000, WRIT’s office building revenues and operating

flex properties (excluding 2000 and 1999 acquisitions and dispositions)

income increased by 15% and 17%, respectively, over 1999. These

increased 17% and 10%, respectively, from 1999 to 2000 due to

increases were primarily due to increased rental rates for the sector,

increased rental rate growth and higher occupancy levels. Economic

the 2000 acquisitions of Wayne Plaza and Courthouse Square and

occupancy rates for the core group of industrial properties averaged

the 1999 acquisitions of 600 Jefferson Plaza, 1700 Research

96% in 2000 compared to 94% in 1999.

Boulevard and Parklawn Plaza. These increases were offset in part

Rental rate increases of 4% for the core group of industrial/flex

by the 1999 sales of Arlington Financial Center and 444 N. Frederick

properties were the result of increases at the majority of the centers.

Road and a slight decline in occupancy levels.

During 2000, WRIT executed new leases for 1,083,000 square feet

Revenues and operating income in WRIT’s core group of office

of industrial space leases at an average face rent increase of 19%

buildings (excluding 2000 and 1999 acquisitions and dispositions)

on a non-straight line basis.

increased 9% and 10%, respectively, from 1999 to 2000. These

increases were a result of strong rental rate growth with some mod-

erate occupancy gains throughout the sector. Economic occupancy

OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS
Real estate operating expenses as a percentage of revenue were 28%

rates for the core group of office buildings averaged 97% for 2000

for both 2001 and 2000 and 30% for 1999. Real estate operating

and 1999.

expenses increased to $42.1 million in 2001 from $38.3 million in

Rental rate increases of 7% for the core group of office buildings

2000 and $35.3 million in 1999 in general due to the acquisition of

were the result of increases at nearly all of the properties. During 2000,

three real estate properties in 2001, three real estate properties in

WRIT executed new leases for 758,000 square feet of office space at

2000 and seven real estate properties in 1999 as well as higher real

an average face rent increase of 18% on a non-straight line basis.

estate taxes due to increases in assessed value throughout much

During 2000, WRIT’s retail center revenues and operating income

of the portfolio. Core portfolio operating expenses increased 4% in

increased by 1% and 2%, respectively, over 1999. The increases were
due to the 2000 acquisition of 833 S. Washington Street combined

2001 from 2000 and 5% in 2000 from 1999 due primarily to higher
real estate taxes and property management fees attributable to the

increase in real estate revenue. It should be noted property manage-

Management believes that WRIT has the liquidity and the capital

ment fees are passed through to tenants as part of the full service

resources necessary to meet all of its known obligations and to make

rent or as a contractual pass through.

additional property acquisitions and capital improvements when

Depreciation and amortization expense increased $4.0 million

appropriate to enhance long-term growth.

in 2001 from 2000 due to total acquisitions of $67.8 million in 2001,

WRIT has two line of credit commitments in place from commer-

$26.6 million of acquisitions throughout 2000 and capital and tenant

cial banks: a $25.0 million line of credit and a $50.0 million line of

improvement expenditures, of $14.0 million and $16.3 million for

credit. Both bear interest at an adjustable spread over LIBOR based

2001 and 2000, respectively. Depreciation and amortization expense

on the Trust’s interest coverage ratio and public debt rating. As of

increased $3.1 million in 2000 from 1999 due to $26.6 million of

December 31, 2001, WRIT had $0 outstanding under the company’s

acquisitions in 2000, $61.8 million in acquisitions throughout 1999

lines of credit. The $25.0 million line of credit matures March 2002, and

and $16.3 million and $18.4 million, respectively, in 2001 and 2000

negotiations for renewal of this line of credit are under discussion.

capital and tenant improvement expenditures.

The lines of credit and senior and medium-term notes payable

Interest expense increased $1.5 million in 2001 from 2000. The

increase is primarily attributable to the issuance of $55.0 million in

contain certain financial and non-financial covenants, all of which
WRIT has met as of December 31, 2001. The covenants at present

medium-term notes in November 2000 used to pay off WRIT’s unse-

require insurance coverage for all perils or special form types of

cured lines of credit and the assumption of an $8.5 million mortgage

insurance. The loan documents currently make no specific reference

in November 2001 with the acquisition of Sullyfield Commerce Center.

to terrorism insurance. WRIT believes it is currently covered against

Interest expense increased $3.3 million in 2000 from 1999. The

such acts under the insurance coverage in full force and effect until

increase is primarily attributable to a higher average unsecured line of

renewal in September 2002. WRIT anticipates obtaining additional

credit balance outstanding combined with higher variable interest rates,

insurance coverage at higher costs upon renewal; however, the

the issuance of $55.0 million in medium-term notes in November 2000

Trust’s financial condition and results of operations are subject to

used to pay off WRIT’s unsecured lines of credit and the assumption

the risks associated with acts of terrorism and the potential for

of an $8.7 million mortgage in September 1999 with the acquisition

uninsured losses as the result of any such act.

of Avondale Apartments.

WRIT acquired three properties in 2001 for total acquisition costs

General and administrative expenses were $6.1 million for 2001

of $67.8 million. Acquisitions in 2000 included three improved proper-

as compared to $7.5 million for 2000 and $6.2 million for 1999. The

ties and the land under Munson Hill Towers at a cost of $26.6 million.

decrease in general and administrative expenses in 2001 from 2000

Seven properties were acquired in 1999 for a total acquisition cost of

was primarily attributable to increased property management fees

$61.8 million.

passed through to tenants in 2001 that in turn reduced the adminis-

2001 acquisitions were funded through income from operations,

trative expenses of the Trust. General and administrative expenses

line of credit advances and proceeds from the public offering in April

also declined in 2001 due to lower incentive compensation as a

2001 and a property sale in September 2001. On April 24, 2001 WRIT

result of a reduced rate of growth of the Trust. The increase in gen-

completed a public offering of 2.3 million shares. The $53.1 million

eral and administrative expenses in 2000 from 1999 was primarily

net proceeds were used to repay $43.0 million in borrowings under the

attributable to increased incentive compensation due to the high rate

Trust’s line of credit. WRIT disposed of one property in 2001 resulting

of growth of the Trust.

in net proceeds of $ 8.1 million.

Gain on sale of real estate was $4.3 million for the year ended

Line of credit advances and the use of proceeds from property

December 31, 2001, resulting from the sale of 10400 Connecticut

sales financed the 2000 acquisitions in February and August 2000.

Avenue. Gain on sale of real estate in 2000 was $3.6 million result-

WRIT disposed of two properties in 2000 resulting in net proceeds of

ing from the sales of Prince William Plaza and Clairmont Center.

$5.7 million. The proceeds from these sales were used to partially

The $7.9 million gain on sale of real estate in 1999 resulted from

fund 2000 acquisitions. On November 6, 2000, WRIT sold $55.0 mil-

the sales of Arlington Financial Center, 444 North Frederick Avenue,

lion of 7.78% unsecured notes due November 2004. The notes bear

Department of Commerce and V Street Distribution Center.

an effective interest rate of 7.89%. Total proceeds to the Trust, net

CAPITAL RESOURCES AND LIQUIDITY
WRIT has utilized the proceeds of share offerings, unsecured and

of underwriting fees, were $54.8 million. WRIT used the proceeds of

these notes to repay advances on its lines of credit.

The 1999 acquisitions were financed by line of credit advances,

secured debt issuance (medium and long-term fixed interest rate

the use of proceeds from property sales in February 1999 and the

debt), bank lines of credit and cash flow from operations for its capi-

assumption of a non-recourse mortgage payable of $8.7 million.

tal needs. Management believes that external sources of capital will

WRIT disposed of six properties in 1999 resulting in net proceeds of

continue to be available to WRIT from its existing unsecured bank line

$22.0 million. On September 27, 1999, WRIT closed on a $50.0 million

of credit commitments and from selling additional shares and/or the

mortgage note payable, the proceeds of which were used to pay down

sale of medium or long-term secured or unsecured notes. The funds
raised would be used for new acquisitions and capital improvements.

WRIT’s unsecured lines of credit. The mortgage is secured by WRIT’s
five Virginia multifamily properties.

Cash flow from operating activities totaled $74.7 million,

$62.0 million and $53.2 million for the years ended December 31,

2001, 2000 and 1999, respectively, including net income of

Accretive Capital Improvements
Acquisition Related—These are capital improvements to properties
acquired during the current and preceding two years which were

$52.4 million (net of $4.3 million gain on property sales), $45.1 million

planned during WRIT’s investment analysis. In 2001 the most significant

(net of $3.6 million gain on property sales) and $44.3 million (net of

of these improvements were made to Wayne Plaza, One Central Plaza,

$7.9 million gain on property sales), respectively, and depreciation

Courthouse Square and Avondale Apartments. In 2000, the most sig-

and amortization of $26.7 million, $22.7 million and $19.6 million,

nificant of these improvements were made to Pickett Industrial Center,

respectively. The increase in cash flows from operating activities

Northern Virginia Industrial Park, Earhart Building, South Washington

in 2001 and 2000 was primarily due to real estate acquisitions,

Street, Bethesda Hill Apartments and Munson Hill Towers. In 1999, the

increased operating income from previously owned properties and

most significant of these improvements were made to 7900 Westpark

the resultant increase in net income.

Drive, Woodburn Medical Park, Bethesda Hill Apartments, Ammendale

Cash flows used in investing activities totaled $65.7 million,

Technology Park II and Northern Virginia Industrial Park.

$37.4 million and $49.9 million for the years ended December 31,
2001, 2000 and 1999, respectively. The increase in cash flows

used in investing activities in 2001 from 2000 is attributable to an

increase in real estate acquisitions offset by lower capital improve-

ments and higher net proceeds for the property sale in 2001. The

decline in cash flows used in investing activities in 2000 from 1999

is attributable to a reduction in real estate acquisitions and lower

net proceeds from the sale of real estate.

Cash flows provided by financing activities were $11.0 million for

the year ended December 31, 2001 compared to cash flows used in

financing activities of $22.9 million and $3.2 million for the years ended

December 31, 2000 and December 31, 1999, respectively. Cash flows

provided by financing activities in 2001 compared to 2000 increased

as a result of the $53.1 million proceeds from the 2001 public offering

Expansions and Major Renovations—Expansions increase the rentable
area of a property. Major renovations are improvements sufficient to

increase the income otherwise achievable at a property. In February

2001, WRIT acquired an apartment building at 1611 North Clarendon

Boulevard adjacent to WRIT’s 1600 Wilson Boulevard office property

with the intent of developing a high-rise apartment building on that site

utilizing the available density rights from both properties. Expansion

costs in 2001 include costs associated with this development as well

as a façade renovation of Westminster Shopping Center. 2000 expan-

sion costs were related to the final costs associated with the expansion

at 7900 Westpark Drive. During 1999, WRIT completed the 49,000

square foot expansion at 7900 Westpark Drive. WRIT also completed

the renovation of the Bradlee Shopping Center during 1999.

and an increase in share options exercised offset by increased dividend

payments in 2001. Cash flows used in financing activities in 2000 com-

Tenant Improvements—Tenant Improvements are costs associated
with commercial lease transactions such as painting, carpeting and

pared to 1999 increased as a result of increased dividend payments in

other space build-out.

2000, increased line of credit repayments in excess of advances, offset

WRIT’s average Tenant Improvement Costs for 1999–2001 per

by net proceeds from the debt offering in 2000.

square foot of space leased were as follows:

Rental revenue has been the principal source of funds to pay

WRIT’s operating expenses, interest expense and dividends to share-

holders. In 2001, 2000 and 1999, WRIT paid dividends totaling

$49.7 million, $44.0 million and $41.3 million, respectively.

Office Buildings
Retail Centers
Industrial/Flex Properties

Year Ended December 31,
2000
$4.71
$1.81
$1.47

1999
$4.59
$0.69
$0.55

2001
$4.56
$2.65
$0.17

CAPITAL IMPROVEMENTS
Capital improvements of $14.0 million were completed in 2001,

including tenant improvements. Capital improvements to WRIT prop-

erties in 2000 and 1999 were approximately $16.3 million and

$18.4 million, respectively.

WRIT’s capital improvement costs for 1999–2001 were as follows:

Year Ended December 31,
2000

1999

2001

(In thousands)
Accretive capital improvements:

Acquisition related
Expansions and

major renovations
Tenant improvements
Total Accretive

capital improvements

Other
Total

$ 3,528

$ 1,640

$ 5,716

794
4,096

892
6,342

5,929
2,342

8,418
5,597
$14,015

8,874
7,394
$16,268

13,987
4,384
$18,371

The Retail and Industrial Tenant Improvement costs are sub-

stantially lower than Office Improvement costs due to the tenant

improvements required in these property types being substantially

less extensive than in offices. WRIT believes its office tenant

improvement costs are among the lowest in the industry for a number

of reasons. Approximately 69% of our office tenants renew their

leases with WRIT. Renewing tenants generally require minimal tenant

improvements. In addition, lower tenant improvement costs are one

of the many benefits of WRIT’s focus on leasing to smaller office

tenants. Smaller office suites have limited configuration alternatives.

Therefore, WRIT is often able to lease an existing suite with tenant

improvements being limited to new paint and carpet.

Other Capital Improvements
Other Capital Improvements are those not included in the above cate-

dence; (f) unemployment rates; (g) consumer tastes and preferences;

gories. These are also referred to as recurring capital improvements.

(h) stock price and interest rate fluctuations; (i) WRIT’s future capital

Over time these costs will be reincurred to maintain a property’s

requirements; (j) competition; (k) compliance with applicable laws, includ-

income and value. In the Trust’s residential properties, these include

ing those concerning the environment and access by persons with dis-

new appliances, flooring, cabinets, bathroom fixtures, and the like.

abilities; (l) weather conditions and (m) the effects of changes in capital

These improvements are made as needed upon vacancy of an apart-

availability to the technology and biotechnology sectors of the economy.

ment and averaged $958 for the 39% of apartments turned over in

2001. In 2001, WRIT also expensed an average of $355 per apartment

turnover for items which do not have a long-term life and are, therefore,

RATIOS OF EARNINGS TO FIXED CHARGES AND DEBT SERVICE COVERAGE
The following table sets forth the Trust’s ratios of earnings to fixed

not capitalized.

charges and debt service coverage for the periods shown:

FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements which involve

risks and uncertainties. Such forward-looking statements include

Earnings to fixed charges
Debt service coverage

Year Ended December 31,
2000
2.63x
3.40x

1999
2.61x
3.42x

2001
2.78x
3.60x

(a) WRIT’s intention to invest in properties that it believes will continue

We computed the ratios of earnings to fixed charges by dividing

to increase in income and value; (b) WRIT’s belief that its real estate

earnings by fixed charges. For this purpose, earnings consist of

markets will continue to perform well in 2002; (c) WRIT’s belief that

income from continuing operations plus fixed charges. Fixed charges

external sources of capital will continue to be available and that addi-

consist of interest expense, including interest costs capitalized, and

tional sources of capital will be available from the sale of shares or

the amortized costs of debt issuance.

notes; (d) WRIT’s belief that it has the liquidity and capital resources

We computed debt service coverage ratio by dividing earnings

necessar y to meet its known obligations and to make additional

before interest income and expense, depreciation, amortization and gain

property acquisitions and capital improvements when appropriate

on sale of real estate by interest expense and principal amortization.

to enhance long-term growth and (e) other statements preceded by,

followed by or that include the words “believes,” “expects,” “intends,”

“anticipates,” “potential” and other similar expressions.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The principal material financial market risk to which WRIT is exposed is

WRIT claims the protection of the safe harbor for forward-looking

interest-rate risk. WRIT’s exposure to market risk for changes in inter-

statements contained in the Private Securities Litigation Reform Act

est rates relates primarily to refinancing long-term fixed rate obliga-

of 1995 for the foregoing statements. The following important factors,

tions, the opportunity cost of fixed rate obligations in a falling interest

in addition to those discussed elsewhere in this Annual Report, could

rate environment and its variable rate lines of credit. WRIT primarily

affect WRIT’s future results and could cause those results to differ mate-

enters into debt obligations to support general corporate purposes

rially from those expressed in the forward-looking statements: (a) the

including acquisition of real estate properties, capital improvements

economic health of WRIT’s tenants; (b) the economic health of the

and working capital needs. In the past WRIT has used interest rate

Greater Washington-Baltimore region, or other markets WRIT may enter,

hedge agreements to hedge against rising interest rates in anticipation

including the effects of changes in Federal government spending;

of imminent refinancing or new debt issuance.

The table below presents principal, interest and related weighted average interest rates by year of maturity, with respect to debt outstanding

on December 31, 2001.

2002

2003

2004

2005

2006

Thereafter

Total

Fair Value

(In thousands)
DEBT (all fixed rate except lines of credit)
Unsecured debt
Principal
Interest
Average interest rate

$
—
$19,230

$50,000
$18,043

$55,000
$15,311

$
—
$11,389

$50,000
$10,180

$110,000
$ 81,558

$265,000
$155,711

$272,689

7.37%

7.36%

7.33%

7.17%

7.11%

7.33%

7.32%

Mortgages

Principal amortization
(30-year schedule)

Interest
Average interest rate

$ 1,177
$ 7,129

$ 7,651
$ 6,456

$ 1,113
$ 6,383

$26,638
$ 5,790

$
302
$ 4,282

$ 57,845
$ 13,505

$ 94,726
$ 43,545

$ 98,786

7.42%

7.30%

7.09%

7.01%

7.17%

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

Land

Building

Total real estate, at cost

Accumulated depreciation

Total investment in real estate, net

Cash and cash equivalents

Rents and other receivables, net of allowance for doubtful

accounts of $1,993 and $1,743, respectively

Prepaid expenses and other assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable and other liabilities

Advance rents

Tenant security deposits

Mortgage notes payable

Notes payable

Total liabilities

Minority interest

Shareholders’ equity

Shares of beneficial interest, $.01 par value; 100,000 shares authorized:

38,829 and 35,740 shares issued and outstanding, respectively

Additional paid in capital

Retained earnings (deficit)

Total shareholders’ equity

Total liabilities and shareholders’ equity

The accompanying notes are an integral part of these statements.

As of December 31,

2001

2000

$ 151,782

$ 142,811

622,804

774,586

(122,625)

651,961

26,441

10,523

19,010

555,702

698,513

(100,906)

597,607

6,426

9,795

19,587

$ 707,935

$ 633,415

$ 13,239

$ 13,048

3,604

6,148

94,726

265,000

382,717

1,611

3,269

5,624

86,260

265,000

373,201

1,558

388

323,257

(38)

323,607

$ 707,935

357

261,004

(2,705)

258,656

$ 633,415

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

Real estate rental revenue

Real estate expenses

Utilities

Real estate taxes

Repairs and maintenance

Administrative

Management fees

Operating services and supplies

Common area maintenance

Other expenses

Total real estate expenses

Operating income

Depreciation and amortization

Income from real estate

Other income

Interest expense

General and administrative expenses

Income before gain on sale of real estate

Gain on sale of real estate

Net income

Basic earnings per share

Diluted earnings per share

Weighted Average Shares Outstanding—Basic

Weighted Average Shares Outstanding—Diluted

The accompanying notes are an integral part of these statements.

For the Years Ended December 31,
2000

2001

1999

$148,424

$134,732

$118,975

8,351

10,307

6,148

3,068

4,669

5,864

2,074

1,666

42,147

106,277

26,735

79,542

1,686

(27,071)

(6,100)

48,057

4,296

7,682

9,347

5,580

2,753

4,195

5,459

1,961

1,339

38,316

96,416

22,723

73,693

943

(25,531)

(7,533)

41,572

3,567

7,298

8,496

4,765

2,520

3,693

4,856

1,850

1,803

35,281

83,694

19,590

64,104

732

(22,271)

(6,173)

36,392

7,909

$ 52,353

$ 45,139

$ 44,301

1.39

1.38

37,674

37,951

1.26

35,735

35,872

1.24

35,714

35,723

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)
Balance, December 31, 1998

Net income

Dividends

Share options exercised

Share grants

Balance, December 31, 1999

Net income

Dividends

Share options exercised

Share grants

Balance, December 31, 2000

Net income

Dividends

Share options exercised

Share offering

Share grants

For the Years Ended December 31, 2001, 2000 and 1999

Shares of
Beneficial
Interest at
Par Value

Additional
Paid in
Capital

Retained
Earnings
(Deficit)

Shareholders’
Equity

35,692

$357

$260,225

$ (6,849)

$253,733

—

286

210

44,301

(41,341)

—

286

210

35,721

357

260,721

(3,889)

257,189

—

100

183

45,139

(43,955)

—

100

183

35,740

357

261,004

(2,705)

258,656

—

518

2,535

—

8,464

53,083

706

52,353

(49,686)

—

8,469

53,108

707

Balance, December 31, 2001

38,829

$388

$323,257

(38)

$323,607

The accompanying notes are an integral part of these statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

CASH FLOW FROM OPERATING ACTIVITIES

Net income

Adjustments to reconcile net income to cash

provided by operating activities:

Gain on sale of real estate

Depreciation and amortization

Increases in other assets

Increases (decreases) in other liabilities

Share grants

Cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Real estate acquisitions, net*

Improvements to real estate

Non-real estate capital improvements

Net proceeds from sale of real estate

Cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Net proceeds from share offering

Dividends paid

Line of credit advances

Repayments of lines of credit

Proceeds from mortgage note payable

Mortgage principal payments

Net proceeds from debt offering

Net proceeds from the exercise of share options

Cash provided by (used in) financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Supplemental disclosure of cash flow information:

Cash paid for interest

For the Years Ended December 31,
2000

1999

2001

$ 52,353

$ 45,139

$ 44,301

(3,567)

22,723

(3,382)

834

227

(7,909)

19,590

(1,954)

(985)

177

61,974

53,220

(4,296)

26,735

(1,949)

1,610

219

74,672

(59,250)

(14,015)

(538)

8,115

(26,581)

(16,268)

(267)

5,732

(65,688)

(37,384)

53,083

(49,686)

43,000

(43,000)

—

(843)

—

8,477

11,031

20,015

6,426

—

(43,955)

21,000

(54,000)

—

(778)

54,753

100

(22,880)

1,710

4,716

(53,197)

(18,371)

(350)

22,033

(49,885)

—

(41,341)

33,000

(44,000)

49,225

(594)

—

496

(3,214)

121

4,595

$ 26,441

$ 6,426

$ 4,716

$ 25,866

$ 24,001

$ 18,968

*SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

On November 1, 2001, WRIT purchased Sullyfield Center for an acquisition cost of $21.7 million. WRIT assumed a mortgage in the
amount of $8.5 million and paid the balance in cash. The $8.5 million of assumed mortgage is not included in the $59.3 million amount
shown as 2001 real estate acquisitions.

On September 20, 1999, WRIT purchased Avondale Apartments for an acquisition cost of $13.0 million. WRIT assumed a mortgage in
the amount of $8.7 million and paid the balance in cash. The $8.7 million of assumed mortgage is not included in the $53.2 million
amount shown as 1999 real estate acquisitions.

The accompanying notes are an integral part of these statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001, 2000 and 1999

1. NATURE OF BUSINESS
Washington Real Estate Investment Trust, a Maryland real estate

derivative instruments acquired by WRIT in future periods. WRIT has

entered into interest rate protection agreements in the past to reduce

investment trust (“WRIT,” the “company” or the “Trust”), is a self-

its exposure to interest rate risk on anticipated borrowings. The costs

administered, self-managed, equity real estate investment trust,

(if any) of such agreements which qualify for hedge accounting are

successor to a trust organized in 1960. The Trust’s business con-

included in other assets and are amortized over the interest rate pro-

sists of the ownership and operation of income-producing real estate

tection agreement term. In the event that interest rate protection

properties in the greater Washington-Baltimore region. WRIT owns

agreements that qualify for hedge accounting are terminated or are

a diversified portfolio of office buildings, industrial/flex properties,

closed out, the associated gain or loss is deferred and amortized

multifamily buildings and retail centers.

Federal Income Taxes
WRIT operates in a manner intended to enable it to qualify as a real

estate investment trust (REIT) under the Internal Revenue Code

over the term of the underlying hedged asset or liability. Amounts to

be paid or received under interest rate protection agreements are

accrued currently and are netted with interest expense for financial

statement presentation purposes.

(the “Code”). In accordance with the Code, a trust which distributes

its capital gains and at least 90 percent of its taxable income to

Revenue Recognition
Residential properties are leased under operating leases with terms

its shareholders each year (95% for years prior to 2001), and which

of generally one year or less, and commercial properties are leased

meets certain other conditions, will not be taxed on that portion of

under operating leases with average terms of three to five years.

its taxable income which is distributed to its shareholders. WRIT

WRIT recognizes rental income and rental abatements from the com-

believes it qualifies as a REIT and has distributed all of its taxable

pany’s residential and commercial leases when earned in accordance

income for the fiscal years through 2001 in accordance with the

with SFAS No. 13. WRIT records an allowance for doubtful accounts

provisions of the Code. Accordingly, no provision for federal income

equal to the estimated uncollectible amounts. This estimate is based

taxes is required.

2. ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the

on WRIT’s historical experience and a review of the current status

of the company’s receivables. Contingent rents are recorded when

cumulative sales exceed the amount necessary for the contingent

rents to equal minimum annual rent, and WRIT has been informed

of cumulative sales data; thereafter, percentage rent is accrued

accounts of the Trust and its majority owned subsidiaries, after

based on subsequent sales.

eliminating all intercompany transactions.

New Accounting Pronouncements
Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued

Statement of Financial Accounting Standards (“SFAS”) No. 144,

“Accounting for the Impairment or Disposal of Long-Lived Assets”,

which supersedes SFAS No. 121, “Accounting for the Impairment

of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”.

WRIT recognizes cost reimbursement income from pass-through

expenses on an accrual basis over the periods in which the expenses

were incurred. Pass-through expenses are comprised of real estate

taxes, operating expenses and common area maintenance costs

which are reimbursed by tenants in accordance with specific allowable

costs per tenant lease agreements.

Minority Interest
WRIT entered into an operating agreement with a member of the previ-

SFAS No. 144 is effective for all quarters of fiscal years beginning

ous ownership entity of Northern Virginia Industrial Park in conjunction

after December 15, 2001. At December 31, 2001, WRIT held one

with the acquisition of this property in May 1998. This resulted in a

property under contract for sale which sold subsequent to this date

minority ownership interest in this property based upon defined com-

(see Note 15). WRIT recognized no impairment on this property prior

pany ownership units at the date of purchase. WRIT accounts for this

to or upon sale.

Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, “Accounting for Derivative Instruments

and Hedging Activities”, was issued. This statement (as amended by

activity by allocating the percentage ownership interest of the net oper-

ating income of the property to minority interest. Quarterly distributions

are made to the minority owner equal to the quarterly dividend per

share for each ownership unit.

SFAS No. 137, “Accounting for Derivative Instruments and Hedging

Activities—Deferral of the Effective Date of SFAS Statement No. 133)

Deferred Financing Costs
Costs associated with the issuance of mortgage and other notes and

establishes accounting and reporting standards for derivative instru-

draws on lines of credit are capitalized and amortized using the effective

ments, including certain derivative instruments embedded in other

interest rate method over the term of the related notes and are included

contracts (collectively referred to as derivatives) and for hedging acti-

in interest expense on the accompanying statements of income.

vities. This statement is effective for all fiscal quarters of fiscal years

The amortized debt costs included in interest expense totaled

beginning after January 1, 2001. Although WRIT currently has no
derivative instruments, this statement will affect the reporting of

$1.1 million, $1.0 million and $1.0 million for the years ended
December 31, 2001, 2000 and 1999, respectively.

Real Estate and Depreciation
Buildings are depreciated on a straight-line basis over estimated useful

The weighted-average number of shares outstanding for the years

ended December 31, 2001, 2000 and 1999 were 37.7 million, 35.7 mil-

lives not exceeding 50 years. All capital improvement expenditures asso-

lion and 35.7 million, respectively, and 38.0 million, 35.9 million and

ciated with replacements, improvements, or major repairs to real prop-

35.7 million on a diluted basis for the years ended December 31, 2001,

erty are depreciated using the straight-line method over their estimated

2000 and 1999, respectively.

useful lives ranging from 3 to 30 years. All tenant improvements are

amortized over the shorter of the useful life or the term of the lease.

Maintenance and repair costs are charged to expense as incurred.

WRIT recognizes impairment losses on long-lived assets used

in operations when indicators of impairment are present and the net

undiscounted cash flows estimated to be generated by those assets

are less than the assets’ carrying amount. If such carrying amount

is in excess of the estimated projected operating cash flows of the

property, WRIT would recognize an impairment loss equivalent to an

amount required to adjust the carrying amount to the estimated fair

market value. There were no property impairments recognized during

Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with accounting

principles generally accepted in the United States requires manage-

ment to make certain estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosure of contin-

gent assets and liabilities at the date of the financial statements and

the reported amounts of revenues and expenses during the reporting

period. Actual results could differ from those estimates.

Reclassifications
Certain prior year amounts have been reclassified to conform to the

the three-year period ending December 31, 2001. In accordance with

current year presentation.

SFAS No. 66, “Accounting for Sales of Real Estate,” sales are recog-

nized at closing only when sufficient down payments have been obtained,

possession and other attributes of ownership have been transferred to

3. REAL ESTATE INVESTMENTS
WRIT’s real estate investment portfolio, at cost, consists of proper-

the buyer and the Trust has no significant continuing involvement. The

ties located in Maryland, Washington, D.C. and Virginia as follows:

gain or loss resulting from the sale of properties is included in net

income at the time of sale.

Cash and Cash Equivalents
Cash and cash equivalents include investments readily convertible to

known amounts of cash with original maturities of 90 days or less.

Stock Based Compensation
WRIT maintains Incentive Stock Option Plans as described in Note 8

(In thousands)
Office Buildings
Retail Centers
Multifamily
Industrial/Flex Properties

December 31,

2001

2000

$431,213
95,626
106,381
141,366
$774,586

$383,530
94,900
102,142
117,941
$698,513

WRIT’s results of operations are dependent on the overall eco-

which include qualified and non-qualified options for eligible employ-

nomic health of its tenants and the specific segments in which WRIT

ees. Stock options are accounted for in accordance with APB 25,

holds properties, as well as the overall economic health of the mar-

whereby if options are priced at fair market value or above at the

kets in which it owns property. These segments include commercial

date of grant, no compensation expense is recognized.

office, multifamily, retail and industrial. Although all sectors are

Comprehensive Income
WRIT has no items of comprehensive income that would require sepa-

rate reporting in the accompanying consolidated statements of income.

Earnings Per Common Share
The Trust calculates basic and diluted earnings per share in accor-

affected by external factors, such as inflation, consumer confidence,

unemployment rates and consumer tastes and preferences, the retail

segment is particularly sensitive to such factors. A decline in the

retail sector of the economy could reduce merchant sales, which

could adversely affect the operating results of WRIT. WRIT’s retail

properties provided 13% of total revenue and 23% of net income for

dance with SFAS No. 128, “Earnings Per Share.” “Basic earnings per

the year ended December 31, 2001, 14% and 33% of total revenue

share” is computed as net income divided by the weighted-average

and net income, respectively, for the year ended December 31, 2000

common shares outstanding. “Diluted earnings per share” is computed

and 15% of total revenue and 25% of net income for the year ended

as net income divided by the total weighted-average common shares

December 31, 1999.

outstanding plus the effect of dilutive common equivalent shares out-

As of December 31, 2001, 7900 Westpark office building accounted

standing for the period. Dilutive common equivalent shares reflect the

for 11 percent of total real estate assets and 9 percent of total revenues.

assumed issuance of additional common shares pursuant to certain

No other single property or tenant accounted for more than 10 percent of

of the Trust’s share based compensation plans (see Note 8) that

total assets or total revenues.

could potentially reduce or “dilute” earnings per share, based on the

treasury stock method.

Properties acquired by WRIT during the years ending December 31, 2001, 2000 and 1999 are as follows:

Acquisition Date
February 15, 2001
April 19, 2001
November 1, 2001

February 29, 2000
May 5, 2000
August 9, 2000
October 10, 2000

January 27, 1999
April 16, 1999
May 21, 1999
May 21, 1999
September 10, 1999
September 20, 1999
November 30, 1999

Property

1611 North Clarendon
One Central Plaza
Sullyfield Commerce Center

833 S. Washington Street
962 Wayne Plaza
Munson Hill Towers Land Lease
Courthouse Square

Dulles South IV
Sully Square
600 Jefferson Plaza
1700 Research Boulevard
Amvax
Avondale (236 units)
Parklawn Plaza

Type
Multifamily
Office
Industrial
Total 2001

Retail
Office
Multifamily
Office
Total 2000

Industrial
Industrial
Office
Office
Industrial
Multifamily
Office
Total 1999

WRIT accounted for each acquisition using the purchase method of accounting.

Properties sold by WRIT during the years ending December 31, 2001, 2000 and 1999 are as follows:

Disposition Date
September 28, 2001

February 29, 2000
July 7, 2000
August 22, 2000

February 5, 1999
February 5, 1999
February 5, 1999
February 26, 1999

Property

10400 Connecticut Avenue

Prince William Plaza
Westminster parcel
Clairmont Center

444 North Frederick Avenue
Arlington Financial Center
Department of Commerce
V Street Distribution Center

Type
Office

Retail
Retail parcel
Retail
Total 2000

Office
Office
Industrial
Industrial
Total 1999

Rentable
Square Feet
11,000
274,000
248,000
533,000

6,000
91,000
N/A
113,000
210,000

83,000
95,000
115,000
103,000
32,000
162,000
40,000
630,000

Acquisition Cost
(In thousands)
$ 1,521
44,549
21,742
$67,812

$ 1,400
7,800
300
17,100
$26,600

$ 6,909
7,557
14,472
12,941
2,231
12,908
4,764
$61,782

Rentable
Square Feet
65,000

Sales Price
(In thousands)
$ 8,400

55,000
10,000
40,000
105,000

66,000
51,000
105,000
31,000
253,000

$ 2,800
425
3,000
$ 6,225

$ 5,671
9,798
7,031
600
$23,100

The total revenues and net income for 10400 Connecticut

consideration for WRIT’s acquisition of Woodburn Medical Park I and II.

Avenue in 2001 were $1.0 million and $0.4 million, respectively.

Both mortgages bear interest at 7.69 percent per annum. Principal

The retail properties disposed in the year ended December 31,

and interest are payable monthly until September 15, 2005, at which

2000 resulted in total revenues and net income of $0.4 million and

time all unpaid principal and interest are payable in full.

$0.2 million, respectively. The office and industrial properties dis-

On September 20, 1999, WRIT assumed an $8.7 million mortgage

posed in the year ended December 31, 1999 resulted in total rev-

note payable as partial consideration for WRIT’s acquisition of the

enues and net income of $0.4 million and $0.3 million, respectively.

Avondale Apartments. The mortgage bears interest at 7.88 percent per

4. MORTGAGE NOTES PAYABLE
On August 22, 1995, WRIT assumed a $7.8 million mortgage note

annum. Principal and interest are payable monthly until November 1,

2005, at which time all unpaid principal and interest are payable in full.

On September 27, 1999, WRIT executed a $50.0 million mortgage

payable as partial consideration for WRIT’s acquisition of Frederick

note payable secured by Munson Hill Towers, Country Club Towers,

County Square retail center. The mortgage bears interest at 9.00 percent

Roosevelt Towers, Park Adams Apartments, and the Ashby Apartments.

per annum. Principal and interest are payable monthly until January 1,

The mortgage bears interest at 7.14 percent per annum and is payable

2003, at which time all unpaid principal and interest are payable in full.

monthly until October 1, 2009, at which time all unpaid principal and

On November 30, 1998, WRIT assumed a $9.2 million mortgage

interest are payable in full. These funds were used to repay advances

note payable and a $12.4 million mortgage note payable as partial

on WRIT’s lines of credit.

On November 1, 2001, WRIT assumed an $8.5 million mortgage

Prior to March 17, 1999, all new advances and interest rate

note payable, fair valued at $9.3 million, as partial consideration for

adjustments, upon the expiration of WRIT’s interest lock-in dates,

WRIT’s acquisition of Sullyfield Commerce Center. The mortgage bears

bore interest at LIBOR plus a spread based on WRIT’s public debt

interest at 9.00 percent per annum. Principal and interest are payable

rating. All unpaid interest and principal could be prepaid prior to the

monthly until February 1, 2007, at which time all unpaid principal and

expiration of WRIT’s interest rate lock-in periods subject to a yield

interest are payable in full. In accordance with the purchase method of

maintenance obligation.

accounting, the mortgage was fair valued at $9.3 million resulting in an

On March 17, 1999, WRIT executed an amended and restated

adjustment to the basis of this property.

agreement extending the maturity date to March 17, 2002. Under

Scheduled principal payments during the five years subsequent

the amended agreement, WRIT may choose either a Corporate Base

to December 31, 2001 and thereafter are as follows:
(In thousands)

2002
2003
2004
2005
2006
Thereafter

$ 1,177
7,651
1,113
26,638
302
57,845
$94,726

5. UNSECURED LINES OF CREDIT PAYABLE
During 2001, WRIT maintained two unsecured lines of credit: a

$25.0 million line of credit (“Credit Facility No. 1”) and a $50.0 million

line of credit (“Credit Facility No. 2”).

Credit Facility No. 1
WRIT had $0 outstanding as of December 31, 2001 and 2000 related

to Credit Facility No. 1.

The following advances have been made under this commitment:

Advance
Date
May 1999
Mar.–Sept. 1999
Jan.–March 2000

Date Paid
in Full
July 1999
Jan.–March 2000
November 2000

Amount
(In thousands)
$12,000
22,000
$22,000

2001
Rate
—
—
—

2000
Rate
—
6.33%
7.33%

1999
Rate
5.67%
6.33%
—

Rate (“CBR”) or a LIBOR advance. Both advances have interest

rates based on the applicable rate plus a spread based on the

most recent ratings from Moody’s and/or S&P for WRIT’s long-term

unsecured debt. Negotiations for renewal of this line of credit are
under discussion.

This $25.0 million credit commitment requires WRIT to pay

quarterly to the lender an unused commitment fee at the rate of

0.375 percent per annum on the amount by which the $25.0 million

commitment exceeds the balance of outstanding advances and term

loans. At both December 31, 2001 and 2000, $25.0 million of this

commitment was unused and available for subsequent acquisitions or

capital improvements. This commitment also contains certain finan-

cial and non-financial covenants including debt service coverage, net

worth, and permitted indebtedness ratios, which WRIT has met as of

December 31, 2001. In addition, this commitment requires approval

to be obtained from the lender for purchases by the Trust over an

agreed upon amount.

Credit Facility No. 2
WRIT had $0 outstanding as of December 31, 2001 and 2000 related to Credit Facility No. 2. The following advances have been made under

this commitment:

Advance
Date
May 1998
June 1998
Sept.–Nov. 1998
Jan.–Sept. 1999
Sept.–Nov. 1999
March 2000
May 2000
June 2000
August 2000
October 2000
April 19, 2001

Date Paid
in Full
July 1999
June 1999
March–May 1999
July–Sept. 1999
June–Aug. 2000
November 2000
November 2000
November 2000
November 2000
November 2000
April 27, 2001

Amount
(In thousands)
$13,000
4,000
27,000
51,000
11,000
2,000
5,000
7,000
4,000
14,000
$43,000

2001
Rate
—
—
—
—
—
—
—
—
—
—
5.38%

2000
Rate
—
—
—
—
—
7.45%–7.81%
7.80%–7.81%
6.64%–7.81%
6.86%–7.51%
7.46%
—

1999
Rate
5.54%
6.02%
5.85%
5.90%
6.72%
—
—
—
—
—
—

1998
Rate
5.54%–6.39%
6.02%–6.39%
5.85%
—
—
—
—
—
—
—
—

On July 25, 1999, WRIT executed an agreement to amend and

effective interest rate of 7.46 percent, and the 10-year notes bear an

restate the original Credit Facility No. 2 agreement. All unpaid interest

effective interest rate of 7.49 percent, for a combined effective inter-

and principal are due July 2002 and can be prepaid prior to this date

est rate of 7.47 percent. WRIT used the proceeds of these notes to

without any prepayment fee or yield maintenance obligation. Any new

repay advances on its lines of credit and to finance acquisitions and

advances shall bear interest at LIBOR plus a spread based on WRIT’s

capital improvements. These notes do not require any principal pay-

public debt rating. Negotiations for renewal of this line of credit are

ment and are due in full at maturity.

under discussion.

Credit Facility No. 2 provides WRIT the option to convert any

advances or portions thereof into a term loan at any time through July

2002. The principal amount of each term loan, if any, shall be repaid

in July 2002.

This $50.0 million credit commitment requires WRIT to pay the

lender an unused commitment fee ranging from 0.15 to 0.25 percent
per annum based on WRIT’s public debt rating. The fee is paid on the

amount by which the $50.0 million commitment exceeds the balance

of outstanding advances and term loans. At December 31, 2001 and

2000, $50.0 million and $50.0 million, respectively, of this commit-

ment was unused. This fee is paid quarterly in arrears. This commit-

ment also contains certain financial covenants including cash flow to

debt service, net worth, capitalization and permitted indebtedness

ratios, which WRIT has met as of December 31, 2001.

Credit Facility No. 1 and No. 2 contain certain financial and non-

financial covenants, all of which WRIT has met as of December 31,

2001. The covenants at present require insurance coverage for all per-

ils or special form types of insurance. The loan documents currently

make no specific reference to terrorism insurance. WRIT believes it is

currently covered against such acts under the insurance coverage in

full force and effect until renewal in September 2002. WRIT antici-

pates obtaining additional insurance coverage at higher costs upon

renewal; however, the Trust’s financial condition and results of opera-

tions are subject to the risks associated with acts of terrorism and

the potential for uninsured losses as the result of any such act.

Information related to short-term borrowings are as follows:

(In thousands)
Maximum Amount Outstanding
Average Amount Outstanding
Weighted Average Interest Rate

2001

2000

$43,000
$43,000

$54,000
$33,734

5.38%

7.22%

Medium-Term Notes
On February 20, 1998, WRIT sold $50.0 million of 7.25 percent

unsecured notes due February 25, 2028 at 98.653 percent to yield

approximately 7.36 percent. WRIT also sold $60.0 million in unse-

cured Mandatory Par Put Remarketed Securities (“MOPPRS”) at an

effective borrowing rate through the remarketing date (February 2008)

of approximately 6.74 percent. The net proceeds to WRIT after

deducting loan origination fees was $102.8 million. WRIT used the

proceeds of these notes for general business purposes, including

repayment of outstanding advances under its lines of credit and to

finance acquisitions and capital improvements to its properties.

WRIT’s costs of the borrowings and related closed hedge settlements

of approximately $7.2 million are amortized over the lives of the

notes using the effective interest method. These notes do not require

any principal payment and are due in full at maturity.

On November 6, 2000, WRIT sold $55.0 million of 7.78 percent

unsecured notes due November 2004. The notes bear an effective

interest rate of 7.89 percent. Total proceeds to the Trust, net of

underwriting fees, were $54.8 million. WRIT used the proceeds of

these notes to repay advances on WRIT’s lines of credit.

These notes contain certain financial and non-financial

covenants, all of which WRIT has met as of December 31, 2001. The

covenants at present require insurance coverage for all perils or spe-

cial form types of insurance. The loan documents currently make no

specific reference to terrorism insurance. WRIT believes it is currently

covered against such acts under the insurance coverage is in full

force and effect until renewal in September 2002. WRIT anticipates

obtaining additional insurance coverage at higher costs upon renewal;

however, the Trust’s financial condition and results of operations are

subject to the risks associated with acts of terrorism and the poten-

tial for uninsured losses as the result of any such act.

The 2001 average balance was based on the individual borrowing

outstanding for eight days during this period, and the 2000 average

balance represented multiple borrowings outstanding from January

7. DIVIDENDS
The following is a breakdown of the taxable percentage of WRIT’s

dividends for 2001, 2000 and 1999, respectively:

through November 2000.

6. SENIOR AND MEDIUM-TERM NOTES PAYABLE
Senior Notes
On August 13, 1996 WRIT sold $50.0 million of 7.125 percent 7-year

unsecured notes due August 13, 2003, and $50.0 million of 7.25 per-

2001
2000
1999

Ordinary Income

100%
100%
100%

Return of Capital
0%
0%
0%

8. SHARE OPTIONS AND GRANTS
WRIT maintains Incentive Stock Option Plans (the “Plans”), which

cent unsecured 10-year notes due August 13, 2006. The 7-year notes

include qualified and non-qualified options. As of December 31,

were sold at 99.107 percent of par and the 10-year notes were sold

2001, 1.8 million shares may be awarded to eligible employees.

at 98.166 percent of par. Net proceeds to the Trust after deducting

Under the Plans, options, which are issued at market price on the

underwriting expenses were $97.6 million. The 7-year notes bear an

date of grant, vest after not more than two years and expire ten years

following the date of grant. WRIT adopted the Washington Real Estate Investment Trust 2001 Stock Option Plan (“New Stock Option Plan”) to

replace the 1991 Stock Option Plan (“Stock Option Plan”) that expired on June 25, 2001. The New Stock Option Plan provides for the grant of

incentive and non-qualified stock options to the company’s employees. WRIT’s Board of Trustees approved the New Stock Option Plan at a meeting

held on May 22, 2001 by a unanimous consent, and WRIT’s shareholders approved the New Stock Option Plan at WRIT’s annual meeting of

shareholders, held May 22, 2001. Activity under the Plans is summarized below:

Outstanding at January 1

Granted
Exercised
Expired

Outstanding at December 31
Exercisable at December 31

2001

2000

1999

Shares
1,621,000
238,000
(517,000)
(106,000)
1,236,000
856,000

Wtd Avg
Ex Price
$17.16
24.85
16.39
18.11
18.88
16.87

Shares
1,273,000
376,000
(6,000)
(22,000)
1,621,000
1,008,000

Wtd Avg
Ex Price
$15.87
21.34
15.21
14.74
17.16
16.31

Shares
806,000
513,000
(12,000)
(34,000)
1,273,000
560,000

Wtd Avg
Ex Price
$16.83
14.47
15.89
17.28
15.87
16.54

The 856,000 exercisable options outstanding at December 31,

WRIT has computed basic earnings per share and fully diluted earn-

2001 have exercise prices between $14.47 and $24.85, with a

ings per share. The dilutive impact on basic weighted-average shares

weighted-average exercise price of $16.87 and a weighted average

outstanding for the year ended December 31, 2001 resulted in a $0.01

remaining contractual life of 7.4 years. The remaining 380,000 options

reduction in net income per share. There was no impact of dilution of

have exercise prices between $21.34 and $24.85, with a weighted

common equivalent shares on the basic weighted-average shares out-

average exercise price of $23.28 and a weighted average remaining

standing for the years ended December 31, 2001, 2000 and 1999.

contractual life of 9.6 years.

During 2001 and 2000, WRIT issued 7,209 and 36,417 share

WRIT accounts for the Plan under APB Opinion No. 25, under

grants, respectively, to executives and trustees of the Trust. The

which no compensation cost has been recognized. Had compensation

respective compensation expense was recorded based upon the

cost for the Plan been determined consistent with SFAS No. 123,

share price at the grant date. The Board of Trustees awards share

“Accounting for Stock-Based Compensation,” WRIT’s net income and

grants subject to Compensation Committee recommendations. The

earnings per share would have been reduced to the following pro-

total share grants vested were 41,020 at December 31, 2001 and

forma amounts:

Net Income:

As Reported
Pro-Forma

Basic Earnings Per Share:

As Reported
Pro-Forma

Weighted-average fair value

of options granted

Weighted-average assumptions:

Expected lives (years)
Risk free interest rate
Expected volatility
Expected dividend yield

2001

2000

1999

$52,353
51,523

$45,139
44,214

$44,301
43,419

1.39
1.37

3.49

7
5.08%
19.81%
5.29%

1.26
1.24

2.46

7
5.49%
17.57%
5.85%

1.24
1.22

1.76

7
6.42%
21.05%
7.12%

15,430 at December 31, 2000.

9. BENEFIT PLANS
During 1996, management adopted an Incentive Compensation Plan

(“the Compensation Plan”) for its senior personnel which is intended

to align their compensation growth with shareholders’ interests.

Essentially, the Compensation Plan limits future salary increases and

provides cash bonus incentives, share options under the Incentive

Stock Option Plan and share grants under the Share Grant Plan based

on financial performance of the Trust. The financial incentives to man-

agement are earned after WRIT has achieved a prescribed level of

growth. The Stock Option Plan was adopted in 1991 and expired in

June 2001. The New Stock Option Plan was approved and adopted

The assumptions used in the calculations of weighted average

effective June 2001. The Share Grant Plan is effective from 1996

fair value of options granted are as prescribed under accounting prin-

forward and is reviewed by the Board of Trustees’ Compensation

ciples generally accepted in the United States. Such assumptions

Committee each year. The amounts charged to expense for the share

may not be the same as those used by the financial community and

grants were $0.2 million, $0.6 million and $0.2 million for the years

others in determining the fair value of such options.

ended December 31, 2001, 2000 and 1999, respectively.

In 1997, WRIT implemented a Retirement Savings Plan (the

The estimated fair value information presented is not necessarily

“Savings Plan”). It was established so that participants in the Savings

indicative of amounts the Trust could realize currently in a market

Plan may elect to contribute a portion of their earnings to the Savings

sale since the Trust may be unable to sell such instruments due to

Plan, and WRIT may, at its discretion, make a voluntary contribution

contractual restrictions or the lack of an established market. The

to the Savings Plan.

estimated market values have not been updated since December 31,

WRIT maintained a noncontributory defined benefit pension plan

2001; therefore, current estimates of fair value may differ significantly

for all eligible employees through December 31, 1995. At December 31,

from the amounts presented.

1995, all benefit accruals under the plan were frozen and thus the pro-

Below is a summary of significant methodologies used in estimat-

jected benefit obligation (“PBO”) and the accumulated benefit obligation

ing fair values and a schedule of fair values at December 31, 2001.

(“ABO”) became equal. WRIT terminated the plan as of December 31,

1999, and final participant distributions were made in July 2000.

The Trust adopted a split dollar life insurance plan for senior

officers, excluding the Chief Executive Officer, in 2000. It is intended
that the Trust will recover its costs from the life insurance policies

at death prior to retirement, termination prior to retirement or at

Cash and Cash Equivalents
Includes cash and commercial paper with remaining maturities of less

than 90 days, which are valued at the carrying value.

Mortgage Notes Payable
Mortgage notes payable consist of instruments in which certain of the

retirement age 65. It is intended that the cash values of the policy

Trust’s real estate assets are used for collateral. The fair value of the

in excess of the Trust’s interest can be used by the executive. The

mortgage notes payable is estimated based upon dealer quotes for

Trust has a security interest in the cash value and death benefit of

instruments with similar terms and maturities.

each policy to the extent of the sum of premium payments made

by the Trust.

The Trust has adopted a non-qualified deferred compensation

plan for the Chief Executive Officer and members of the Board of

Trustees. The plan allows for a deferral of a percentage of annual cash

compensation and trustee fees. Compensation deferred will be cred-

ited with interest equal to the Trust’s current cost of borrowings. As

an incentive, if the Chief Executive Officer should remain employed by

WRIT until age 70, the compensation deferred will be credited with an

additional 2.5 percent per annum. In the event of death or retirement

prior to age 70, the compensation plus interest can be paid in either a

Lines of Credit Payable
Lines of credit payable consist of bank facilities which the Trust uses

for various purposes including working capital, acquisition funding or

capital improvements. The lines of credit advances are priced at a

specified rate plus a spread. The carrying value of the lines of credit

payable is estimated to be market value since the interest rate

adjusts with the market. There were no outstanding balances due

on the lines of credit at December 31, 2001.

Notes Payable
Notes payable consists of $50 million, 7.125%, 7-year unsecured

lump sum or in equal installments plus interest at the discretion of the

notes due August 13, 2003, $50 million, 7.25%, 10-year unsecured

plan participant. The plan is unfunded and payments are to be made

notes due August 13, 2006, $50 million, 7.25%, 20-year unsecured

from general assets of the Trust.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the fair value of financial instru-

notes due February 25, 2028, $60 million unsecured Mandatory

Par Put Remarketed Securities with an effective yield of 6.74%

through the remarketing date of February 2008 and $55 million,

7.78%, 4-year unsecured notes due November 15, 2004. The fair

ments. Whenever possible, the estimated fair value has been deter-

value of these securities is estimated based on dealer quotes for

mined using quoted market information as of December 31, 2001.

securities with similar terms and characteristics.

2001

2000

1999

Carrying
Value

$ 26,441
$ 94,726
—
$265,000

Fair
Value

$ 26,441
$ 98,786
—
$272,689

Carrying
Value

$ 6,426
$ 86,260
—
$265,000

Fair
Value

$ 6,426
$ 87,493
—
$258,513

Carrying
Value

$ 4,716
$ 87,037
$ 33,000
$210,000

Fair
Value

$ 4,716
$ 84,520
$ 33,000
$192,420

(In thousands)
Cash and cash equivalents
Mortgage notes payable
Lines of credit payable
Notes payable

11. RENTALS UNDER OPERATING LEASES
Noncancellable commercial operating leases provide for minimum

13. SEGMENT INFORMATION
WRIT has four reportable segments: Office Buildings, Industrial/Flex

rental income before any reserve for uncollectible amounts during

Properties, Multifamily and Retail Centers. Office Buildings, including

each of the next five years of approximately $94.2 million, $76.5 mil-

medical office buildings, represent 55 percent of 2001 real estate

lion, $59.6 million, $41.7 million, $28.8 million and $66.9 million

rental revenue and provide office space for various types of busi-

thereafter. Apartment leases are not included as they are generally

nesses. Industrial represents 14 percent of 2001 real estate rental

for one year. Most of these commercial leases increase in future

revenue and are used for flex-office, warehousing and distribution type

years based on changes in the Consumer Price Index or agreed-upon

facilities. Multifamily properties represent 18 percent of 2001 real

percentages. Contingent rentals from the shopping centers, based

estate rental revenue. These properties provide housing for families

on a percentage of tenants’ gross sales, were $412,000, $217,000

throughout the Washington Metropolitan area. Retail Centers repre-

and $425,000 in 2001, 2000 and 1999, respectively. Real estate

sent the remaining 13 percent of 2001 real estate rental revenue

tax, operating expense and common area maintenance reimburse-

and are typically neighborhood grocery store or drug store anchored

ment income was $8.4 million, $7.9 million and $6.4 million for the

retail centers.

years ended December 31, 2001, 2000 and 1999, respectively.

The accounting policies of the segments are the same as those

12. CONTINGENCIES
In the normal course of business, the Trust is involved in various other

described in Note 2. WRIT evaluates performance based upon operat-

ing income from the combined properties in each segment. WRIT’s

reportable segments are consolidations of similar properties. They are

lawsuits and environmental matters arising in the normal course of busi-

managed separately because each segment requires different operat-

ness. Management believes that such matters will not have a material

ing, pricing and leasing strategies. All of these properties have been

effect on the financial condition or results of operations of the Trust.

acquired separately and are incorporated into the applicable segment.

2001

(In thousands)
Real estate rental revenue
Real estate expenses
Operating income
Depreciation and amortization
Income from real estate
Other income
Interest expense
General and administrative
Income before gain on sale of real estate

Gain on sale of real estate
Net income
Capital investments

Total assets

2000

Gain on sale of real estate
Net income

Capital investments

Total assets

Office
Buildings

Industrial/
Flex Properties

Multifamily

$ 81,023
23,851
57,172
15,195
41,977
499
(1,595)
—
40,881

4,296
$ 45,177
$ 53,449

$380,990

$ 20,702
4,546
16,156
4,173
11,983
6
(104)
—
11,885

—
$ 11,885
$ 14,941

$126,842

$27,455
9,754
17,701
3,836
13,865
22
(4,315)
—
9,572

—
$ 9,572
$ 3,981

$80,033

Office
Buildings

Industrial/
Flex Properties

Multifamily

$ 70,885
21,118
49,767
13,050
36,717
—
(1,630)
—
35,087

—
$ 35,087

$ 31,925

$343,806

$ 19,249
3,997
15,252
3,765
11,487
—
—
—
11,487

—
$ 11,487

$ 4,525

$107,916

$26,234
9,258
16,976
3,486
13,490
—
(4,329)
—
9,161

—
$ 9,161

$ 3,613

$79,767

Retail
Centers

$19,244
3,996
15,248
2,339
12,909
10
(635)
—
12,284

—
$12,284
895
$

$81,090

Retail
Centers

$18,364
3,943
14,421
2,422
11,999
—
(637)
—
11,362

3,567
$14,929

$ 2,787

$82,492

Corporate
and Other

—
—
—
1,192
(1,192)
1,149
(20,422)
(6,100)
(26,565)

—
$(26,565)
538
$

$ 38,980

Corporate
and Other

—
—
—
—
—
943
(18,935)
(7,533)
(25,525)

—
$(25,525)

814

$ 19,434

Consolidated

$148,424
42,147
106,277
26,735
79,542
1,686
(27,071)
(6,100)
48,057

4,296
$ 52,353
$ 73,803

$707,935

Consolidated

$134,732
38,316
96,416
22,723
73,693
943
(25,531)
(7,533)
41,572

3,567
$ 45,139

$ 43,664

$633,415

1999

Gain on sale of real estate
Net income

Capital investments

Total assets

Office
Buildings

Industrial/
Flex Properties

Multifamily

$ 61,657
18,950
42,707
10,979
31,728
—
(1,731)
—
29,997

2,044
$ 32,041

$ 37,691

$321,741

$ 16,196
3,568
12,628
3,301
9,327
—
—
—
9,327

5,865
$ 15,192

$ 19,591

$105,177

$22,926
8,714
14,212
2,915
11,297
—
(1,145)
—
10,152

—
$10,152

$20,324

$79,548

Retail
Centers

$18,196
4,049
14,147
2,395
11,752
—
(653)
—
11,099

—
$11,099

$ 2,049

$84,041

Corporate
and Other

—
—
—
—
—
732
(18,742)
(6,173)
(24,183)

—
$(24,183)

$ 1,216

$ 17,973

Consolidated

$118,975
35,281
83,694
19,590
64,104
732
(22,271)
(6,173)
36,392

7,909
$ 44,301

$ 80,871

$608,480

14. SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS, UNAUDITED)
The following table summarizes financial data by quarter for WRIT for 2001, 2000 and 1999.

2001

Real estate rental revenue
Net income
Net income per share*

2000

Real estate rental revenue
Net income
Net income per share*

1999

Real estate rental revenue
Net income
Net income per share*

First

$35,324
10,728
$ 0.30

$31,935
10,910
$ 0.31

$27,654
16,358
$ 0.46

Second

$37,418
12,394
$ 0.33

$33,350
9,963
$ 0.28

$28,864
8,765
$ 0.25

Quarter

Third

$37,873
16,824
$ 0.43

$34,230
12,793
$ 0.36

$29,566
8,826
$ 0.25

Fourth

$37,809
12,407
$ 0.32

$35,217
11,473
$ 0.32

$32,891
10,352
$ 0.29

*Includes gain on the sale of real estate of $0.11 per share in the third quarter of 2001, $0.04 and $0.06 per share in the first and third quarters of 2000 and
$0.22 per share in the first quarter of 1999, respectively.

15. SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 2001, WRIT closed on the sale of 1501 South Capitol Street. On February 28, 2002, WRIT sold this industrial

property for $ 6.2 million, resulting in a gain of approximately $3.8 million.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS OF
WASHINGTON REAL ESTATE INVESTMENT TRUST
We have audited the accompanying consolidated balance sheets of

Washington Real Estate Investment Trust (the “Trust,” a Maryland

real estate investment trust) and subsidiaries as of December 31,

2001 and 2000, and the related consolidated statements of income,

changes in shareholders’ equity and cash flows for each of the three

years in the period ended December 31, 2001. These financial state-

ments are the responsibility of the Trust’s management. Our responsi-

bility is to express an opinion on these financial statements based on

our audits.

We conducted our audits in accordance with auditing standards

generally accepted in the United States. Those standards require that

we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. An audit also

includes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide

a reasonable basis for our opinion.

In our opinion, the financial statements referred to above pres-

ent fairly, in all material respects, the financial position of the Trust

and subsidiaries as of December 31, 2001 and 2000, and the

results of their operations and their cash flows for each of the three

years in the period ended December 31, 2001, in conformity with

accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Vienna, Virginia

February 20, 2002

CORPORATE INFORMATION

CORPORATE HEADQUARTERS
Washington Real Estate Investment Trust

6110 Executive Boulevard

Rockville, MD 20852-3927

ANNUAL MEETING
WRIT will hold its annual meeting of stockholders on May 21, 2002,

at 11:00 AM at the Hyatt Regency Hotel–Bethesda, One Bethesda

Metro Center, Bethesda, MD.

301.984.9400

800.565.9748

fax 301.984.9610

www.writ.com

COUNSEL
Arent Fox Kintner Plotkin & Kahn, PLLC

1050 Connecticut Avenue, N.W.

Washington, DC 20036-5339

INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP

8000 Towers Crescent Drive

Vienna, VA 22182-2725

TRANSFER AGENT
EquiServe Trust Company, N.A.

P.O. Box 2598

Jersey City, NJ 07303-2598

10-K NOTICE
A copy of the company’s Annual Report to the Securities

and Exchange Commission on Form 10-K may be obtained

without charge. Please direct your request to WRIT’s Investor

Relations Department.

WRIT DIRECT
WRIT’s dividend reinvestment and direct stock purchase plan

permits cash investment of up to $25,000 per month, plus

dividends, with nominal fees, and is IRA eligible.

STOCK INFORMATION
WRIT is traded on the New York Stock Exchange. The symbol listed

in the newspaper is WRIT. The trading symbol is WRE.

MEMBER
National Association of Real Estate Investment Trusts®

1875 Eye Street, N.W.

Suite 600

Washington, DC 20006-5413

FUNDS FROM OPERATIONS
PER SHARE

Washington Real Estate Investment Trust, founded

MISSION STATEMENT

2 0 0 1 $ 1 . 9 6

2 0 0 0 $ 1 . 7 9

1 9 9 9 $ 1 . 5 7

1 9 9 8 $ 1 . 3 9

1 9 9 7 $ 1 . 2 3

CASH DIVIDENDS PAID
PER SHARE

2 0 0 1 $ 1 . 3 1

2 0 0 0

$ 1 . 2 3

1 9 9 9

$ 1 . 1 6

1 9 9 8

$ 1 . 1 1

1 9 9 7

$ 1 . 0 7

in 1960 and headquar tered in Rockville, Mar yland,

invests in a diversified range of income-producing property

types. Our purpose is to acquire and manage real estate

investments in markets we know well and protect our

assets from single proper ty-type value fluctuations

through diversified holdings. Our goal is to continue

to safely increase earnings and shareholder value.

SELECTED FINANCIAL AND OPERATING DATA
IN MILLIONS, EXCEPT FULLY DILUTED PER SHARE AMOUNTS

F O R T H E Y E A R
Real Estate Revenue
Income before Gain

on Sale of Real Estate

Net Income
Funds from Operations
Cash Dividends Paid
Average Shares Outstanding

Net Income
Funds from Operations
Cash Dividends Paid

A T Y E A R E N D
Total Assets
Total Debt
Shareholders’ Equity

2001

2000

1999

1998

1997

$ 148

$ 135

$ 119

$ 104

$ 79

48
52
74
50
39

42
45
64
44
36

$1.27
1.38
1.96
1.31

$1.16
1.26
1.79
1.23

$ 708
360
324

$ 632
351
259

36
44
56
41
36

$1.02
1.24
1.57
1.16

$ 608
330
257

34
41
50
40
36

$ .96
1.15
1.39
1.11

$ 559
283
254

30
30
41
36
33

$ .90
.90
1.23
1.07

$ 469
203
252

P E R F U L L Y D I L U T E D C O M M O N S H A R E
Income before Gain
on Real Estate

WRIT trustees and officers

TRUSTEES

Edmund B. Cronin, Jr.

Chairman, President and
Chief Executive Officer
Director, John J. Kirlin
Companies; Potomac Electric
Power Company

John M. Derrick, Jr.

Chairman and Chief Executive
Officer, Potomac Electric
Power Company

Clifford M. Kendall

Director, Affiliated
Computer Service, Inc.;
VSE Corporation;
Onsite Sourcing, Inc.

John P. McDaniel

Chief Executive Officer,
MedStar Health
Director, AAL/Lutheran
Brotherhood

Charles T. Nason

Chairman and Chief Executive
Officer, Acacia Life Insurance

David M. Osnos

Senior Partner, Arent Fox
Kintner Plotkin & Kahn;
Director, EastGroup Properties;
VSE Corporation

Susan J. Williams

Chief Executive Officer
and President,
Williams Aron & Associates

OFFICERS

Edmund B. Cronin, Jr.

Chairman, President and
Chief Executive Officer

George F. McKenzie

Senior Vice President,
Real Estate

Brian J. Fitzgerald

Managing Director,
Leasing

Laura M. Franklin

Managing Director,
Accounting and Administration,
Corporate Secretary

Sara L. Grootwassink

Managing Director,
Finance and Capital Markets

Kenneth C. Reed

Managing Director,
Property Management

Thomas L. Regnell

Managing Director,
Acquisitions

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Clockwise from rear left: Charles T. Nason, Susan J. Williams, Clifford M. Kendall, John P. McDaniel, John M. Derrick Jr.,
Edmund B. Cronin Jr., David M. Osnos

Clockwise from rear left: Kenneth C. Reed, Sara L. Grootwassink, Brian J. Fitzgerald, Laura M. Franklin,
Thomas L. Regnell, Edmund B. Cronin Jr., George F. McKenzie

WASHINGTON REAL ESTATE
INVESTMENT TRUST

6110 Executive Boulevard

Rockville, Maryland 20852-3927

301-984-9400

800-565-9748

Fax: 301-984-9610

w w w. w r i t . c o m

The graph on the front cover

reflects the total return (dividends plus

price appreciation with all dividends

reinvested) of WRIT, the S&P 500,

the Morgan Stanley REIT Index, the

NASDAQ and the DOW for the period

beginning December 31, 1971, and

ending December 31, 2001.

COMPARE WRIT’S PERFORMANCE
WITH OTHER INDUSTRY LEADERS

$10,000 invested in WRIT since

1971, with dividends reinvested,

would be worth $1,789,000 as

of December 31, 2001.

W R I T $ 1 , 7 8 8 , 7 0 1

S & P 5 0 0 $ 3 4 6 , 2 4 4

R E I T I N D U S T R Y $ 4 0 0 , 3 8 8

N A S D A Q $ 1 9 5 , 0 4 0

D 0 W $ 1 1 9 , 4 5 9

COMPOUND ANNUAL
RATES OF RETURN:

W R I T 1 8 . 2 %

S & P 5 0 0 1 2 . 1 %

R E I T I N D U S T R Y 1 2 . 6 %

N A S D A Q 1 0 . 1 %

D 0 W 8 . 3 %

COMPARATIVE RETURNS OVER 30-YEAR PERIOD

W R I T

S & P 5 0 0

R E I T I N D U S T R Y

D O W

N A S D A Q

W A S H I N G T O N R E A L E S T A T E I N V E S T M E N T T R U S T

ANNUAL REPORT 2001

VALUE 36 consecutive years of

increased earnings per share

GROWTH 31 consecutive years

of increased dividends per share

PERFORMANCE 29 consecutive

years of increased funds from

operations per share

W R I T

S & P 5 0 0

R E I T I N D U S T R Y

N A S D A Q

D O W