2009 Annual Report
years
Founded in 1960, WRIT is the oldest publicly traded REIT formed under the landmark Real Estate Investment Trust Act.
Since then, we have grown to encompass 90 income-producing
properties—all in the nation’s top real estate market.
Washington Real Estate Investment Trust (WRIT) is celebrating its 50th year as a self-administered, self-managed, equity real estate
investment trust. We invest in a diversified portfolio of income-producing properties in five key segments—all in the Greater
Washington, D.C. region and within easy reach of our headquarters. This local focus and diversified strategy has proven successful
through five decades of performance in the best real estate market in the country.
A 50-year history of building value
Our history is inextricably tied to the growth
and underlying stability of the Greater
Washington, D.C. region. Since the 1960s, the
redevelopment of downtown Washington, and
the evolution of the surrounding suburbs as
major business and transportation corridors,
has helped fuel our growth.
DullES aIRpORT OpEnS
I-495 BElTWay IS COmplETED
ThE JOhn F. KEnnEDy CEnTER
FOR ThE pERFORmInG aRTS
OpEnS In WaShInGTOn, D.C.
I-66 COmplETED
mETRORaIl SySTEm, BEGun
In ThE laTE 1960s, OpEnS
Recession
1960s
1961
WRIT trades OTC
as a public company
SEpTEmBER 14, 1960
COnGRESS paSSES
ThE REIT aCT
1960
Founding date
november 18
1970 annual Report
Recession
Recession
1970s
1971
listed on amEX
DRp (Dividend Reinvestment plan)
becomes available
Recession
1980s
WRIT moves to Bethesda, mD
1982 annual Report
1979
purchases 51 monroe,
Rockville's tallest building
WRIT has consistently delivered returns to
our shareholders through good times and bad.
Our diversified investment strategy, a deep under-
standing of our market, and the presence of the
federal government and its support industries have
all contributed to our strong track record.
B. Franklin Kahn
president and CEO
1960–1995
early 1960s 7 properties
2
Annual Report 2009 Our History
InTERnET TaKES OFF, GIvInG RISE TO ThE
DullES TECh CORRIDOR In nORThERn
vIRGInIa aS a maJOR BuSInESS anD
EmplOymEnT huB In ThE REGIOn
human GEnOmE pROJECT IS launChED,
SpaWnInG ThE GROWTh OF ThE BIOTECh
InDuSTRy alOnG ThE I-270 CORRIDOR In
SuBuRBan maRylanD
mCI CEnTER OpEnS
REDSKInS mOvE TO lanDOvER STaDIum
COnGRESS paSSES ThE RECOvERy
aCT anD, By yEaR-EnD 2009, a
TOTal OF $12 BIllIOn IS aWaRDED
TO maRylanD, vIRGInIa anD
WaShInGTOn, D.C. TO STImulaTE
ThE ECOnOmy
TEChnOlOGy/BIOTEChnOlOGy SECTOR
SuRpaSSES ThE FEDERal GOvERnmEnT aS
laRGEST EmplOyER In ThE REGIOn
2007–08
Recession
1980s
1985
$75 million in assets
Recession
1987
Diversified portfolio of 27 properties
includes business centers, shopping
centers, and office and apartment
buildings.
1993 annual Report
1990s
1996
moody’s and S&p assign WRIT with
the highest credit rating of any REIT of
its size: Baa1 and BBB+, respectively.
36-year record of total portfolio
occupancy above 90%.
1999
January 4
WRIT trades on nySE
1984
Bradlee Shopping Center
1995
Ed Cronin becomes
president and CEO
$195 million in assets
WRIT stock hits
all-time high
2000sRecession
2007
George mcKenzie
named president
and CEO
2001 annual Report
$10,000 invested in
WRIT in 1971, with
dividends reinvested,
is worth $1,789,000
on December 31, 2001,
outperforming all the
major indexes.
2010
WRIT rings
closing bell
on nySE
celebrating
50 years in
business.
Our History Annual Report 2009
3
The officers and trustees of WRIT wish to
express their gratitude to mr. Cronin for
his leadership and vision during his tenure
as Chief Executive Officer and Chairman
of WRIT. mr. Cronin will step down from
the Board at the conclusion of his term at
the 2010 annual meeting of shareholders.
as WRIT celebrates its 50th anniversary in
business as the nation’s oldest real estate
investment trust, we wish to acknowledge
the special role mr. Cronin has played
in bringing us the success that we have
enjoyed for the past 15 of those 50 years.
GEORGE F. mcKEnzIE
EDmunD B. CROnIn, JR.
Dear fellow shareholders:
as most of you know, WRIT is the oldest publicly
traded real estate investment trust, or REIT, in
existence and was the second one to be formed
in 1960. This year, 2010, we proudly celebrate our
50th birthday.
many of our original investors or their family members continue to own shares of
WRIT. Since our founding, we have grown consistently and prospered financially, and
have survived through many economic cycles while many other REITs formed prior
to 1992 no longer exist. The key to this success has been the strategic combination
of a regional investment focus in the remarkable Greater metropolitan Washington,
D.C. marketplace, property type diversification, conservative balance sheet manage-
ment, and experienced, locally-based leadership provided by our Board of Trustees
and management.
not unlike other past difficult economic periods, the WRIT strategy continues
to serve us well during these trying times. We finished 2009 with record revenues
and overall occupancy in excess of 93% . Despite the economic downturn, we
achieved an average rental rate increase of 10.2% over expiring leases in our
commercial portfolio and extended our largest tenant (the World Bank) at a very
attractive rent increase. We also stabilized our three recently completed developments
at over 90% leased. Currently we have no construction underway and, in the near
term, none is planned.
In 2009, we strengthened our balance sheet and disposed of weaker assets.
We met these goals by reducing our overall debt by $157 million and selling four
properties, resulting in a gain of $13.3 million and an average unleveraged return on
investment of 12% for the properties sold. Our debt rating agencies confirmed our
Baa1/BBB+ credit ratings, which are among the highest in the REIT industry. On
march 31st, 2010, we will distribute our 193rd consecutive dividend at equal or
increasing levels. although we would have liked to raise our quarterly dividend as
we have every year for the last 38 years, we did not believe an increase was prudent
in 2009 with the continued uncertain global economic environment. as many of
you may know, during 2008 and 2009, 71 REITs (or 56% of all public REITs) decreased
their dividend level or paid a portion of their dividend in shares rather than cash
due to the financial crisis.
During 2009, our property type diversification served its purpose of offsetting
weakness in some sectors with strength in others. Our medical office and multifamily
properties performed well, meeting or exceeding our expectations. Office properties
4
Annual Report 2009 Shareholder Letter
remain generally stable in this environment. Our weakest sectors were our industrial/
Selected Financial and Operating data
flex portfolio and our retail portfolio. Both of these sectors were significantly
(in millions, except fully diluted per share amounts)
impacted by reduced consumer spending in 2009. Our industrial/flex tenants are
typically service providers to the home improvement and construction industries
or retail-oriented establishments such as auto repair shops and furniture stores.
Similarly, in our neighborhood retail centers, the small “mom and pop” stores, as
well as the larger chain stores specializing in consumer products, were severely
impacted in 2009. although we are beginning to see signs of recovery in these
sectors, they will remain challenged in 2010. On the positive side, the strength in
our multifamily and medical office portfolios should continue to demonstrate
strong occupancy and modest rental rate growth, helping to mitigate what
pressure we have seen in the rest of our property portfolio.
We expect that in 2010 there could be interesting investment opportunities
for WRIT. unlike many of our competitors, who are generally single asset focused,
our diversified property ownership strategy enables us to analyze a broader
spectrum of property types. and, with our in-depth regional knowledge, we can
act more expeditiously than many others in making investments in our market.
We continue to read and hear about potential “distressed” asset sales in our
market, but to date there have been limited property sales offerings and only a
few commercial property foreclosures in the Washington, D.C. area. as the year
progresses, we expect increased sales and distressed asset opportunities in our
region, and WRIT is well prepared to take advantage of them.
We thank all the officers and associates at WRIT for their commitment and
hard work, the trustees for their guidance and oversight, and you, the shareholder,
Real Estate Rental Revenue
net Income
Funds from Operations
Cash Dividends paid
average Shares Outstanding (Diluted)
per FUllY dilUted cOMMOn SHare
net Income
Funds from Operations
Cash Dividends paid
at Year-end
Total assets
Total Debt
Shareholders’ Equity
2005
2006
2007
2008
2009
$ 174
78
87
67
42
$ 202
38
92
73
44
$ 249
58
102
78
46
$ 279
27
99
86
49
$ 307
41
122
100
57
$ 1.84
2.07
1.60
$ 0.87
2.10
1.64
$ 1.24
2.21
1.68
$ 0.55
2.00
1.72
$ 0.71
2.14
1.73
$1,139
704
380
$1,531
1,010
450
$1,897
1,307
503
$2,109
1,379
637
$2,045
1,222
745
retUrn On inveSted
capital bY reit SectOrS
Source: KeyBanc Capital Markets
caSH dividendS paid
(dollars per share)
FUndS FrOM OperatiOnS
(dollars per share)
7.42%
$1.60 $1.64 $1.68 $1.72 $1.73
$2.07 $2.10
$2.21
$2.14
$2.00
5.73%
5.89%
6.19%
for your continued confidence in the Washington Real Estate Investment Trust team.
5.36%
GeorGe F. McKenzie
pRESIDEnT anD ChIEF EXECuTIvE OFFICER
edMund B. Cronin, Jr.
ChaIRman OF ThE BOaRD
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
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Shareholder Letter Annual Report 2009
5
Invested in five key sectors across the region
WRIT owns and operates income-producing
properties in five key sectors—office, multifamily,
industrial/flex, medical and retail—across the
Greater Washington, D.C. region. Every one
of our properties is within easy reach of our
Rockville, maryland, headquarters, which gives
us sharp insights into the market and a unique
ability to serve our tenants.
net Operating incOMe cOntribUtiOn bY SectOr
(excludes discontinued operations)
retail 15.7%
(2.0 MilliOn SQ Ft)
MUltiFaMilY 13.4%
(2.2 MilliOn SQ Ft)
WRIT is the only publicly traded
REIT with a diversified investment
strategy focused on the Greater
Washington, D.C. metro area.
Medical 14.3%
(1.3 MilliOn SQ Ft)
OFFice 44.0%
(4.2 MilliOn SQ Ft)
indUStrial/Flex 12.6%
(3.3 MilliOn SQ Ft)
6
Annual Report 2009 Locations
Frederick, MarYland
SUbUrban baltiMOre
M a r Yl a n d
95
270
495
W a S H i n g t O n d c
dUlleS airpOrt
267
66
v i r g i n i a
95
295
495
capital beltWaY
OFFice bUildingS
MUltiFaMilY
indUStrial/Flex
Medical
retail centerS
1901 pennSYlvania avenUe, dc
cOUrtHOUSe SQUare, va
WaYne plaza, Md
A smart strategy, a solid performance
WRIT’s office portfolio includes 27 properties,
representing 4.2 million square feet of space, all strategically
located in and around Washington, D.C. accessibility is the
key. all of our properties are situated in urban locations
or on major transportation arteries, including the Capital
Beltway, Dulles Toll Road and metrorail. We aim for infill
locations in stable markets proximate to demand generators.
as examples, 1901 pennsylvania avenue, shown here, is
in the heart of downtown Washington, D.C., two blocks
from the nearest metro station. Courthouse Square, in
Old Town alexandria, virginia, stands adjacent to the
courthouse and minutes from Reagan national airport,
and Wayne plaza, in Silver Spring, maryland, is situated in
the revitalized town center.
With a geographic balance across the region, our office
properties have an abundance of small and mid-sized tenants,
which helps give the portfolio stability and consistency. In the
fourth quarter of 2009, our office sector economic occupancy
was 92.6% , and all of our properties outperformed their
respective submarkets throughout the year. Overall, for the
year, we executed 684,000 square feet of lease transactions
in this sector and substantially completed the leasing of
Dulles Station, a premium 180,000-square-foot office
building in herndon, virginia, less than a five-minute drive
from Dulles International airport.
Commercial real estate is a local business. Our deep
connection to the community and the inherent stability of
the Washington, D.C. regional market are major factors in
delivering consistent performance in our office portfolio.
In the office sector, we aim for
infill locations in stable markets
proximate to demand generators.
8
Annual Report 2009 Properties
WRIT’s multifamily portfolio has evolved into an
exceptional collection of 11 properties. In recent years,
across our entire portfolio, we have shifted our strategic
focus to inside-the-beltway locations. That emphasis is
clearly evident in the quality of our multifamily properties.
Today, 10 of our residential properties are located inside
the Beltway, which better insulates them from economic
downturns. Given that, the portfolio has achieved consistently
strong occupancies and steady performance. Economic
occupancy was 94.1% in the fourth quarter of 2009.
virginia, two blocks from the Rosslyn and Court house
metro stations. By mid-2009, these new developments
were stabilized, a testament to the strength of the
Washington, D.C. market, the WRIT team and the quality
of these properties.
We continue to aggressively manage our assets to
divest of properties within submarkets with less growth
potential. In 2009, we completed the sale of the avondale
apartments in laurel, maryland, for $19.75 million, and a
net book gain of $6.7 million.
In addition, in 2009, we successfully completed lease-up
Shown here: 3801 Connecticut avenue, a 306-unit,
of two new multifamily developments: The Clayborne
apartments (shown here), a four-story, 74-unit apartment
building in historic alexandria, virginia, and Bennett park, a
224-unit high-rise in the sought-after suburb of arlington,
nine-story apartment building located in an affluent
northwest Washington, D.C. neighborhood less than
a half mile from two metro stations.
All but one of WRIT’s
multifamily properties lie
within the Beltway, a truly
recession-proof area.
A strategic focus inside the Capital Beltway
3801 cOnnecticUt avenUe, dc
claYbOrne apartMentS, va
MultiFamily Annual Report 2009
11
2009 was a challenging environment for everyone in
commercial real estate. WRIT felt the greatest impact in
its industrial/flex portfolio. The portfolio encompasses a
mix of properties including flex/showroom facilities and
industrial buildings, many along the I-95/395 corridor. most
of our tenants are smaller businesses that experienced the
impact of the decline in business activity, and portfolio
economic occupancy was 87.3% in the fourth quarter
of 2009. The upside: as the economy improves, these
properties will lease up faster than other types of properties,
and we expect them to bounce back quickly, serving as a
catalyst for growth.
The federal government’s presence in the D.C. region
helped soften the overall impact of the economic downturn
in our industrial/flex portfolio. In 2009, WRIT completed a
number of renewal transactions with the u.S. General
Services administration. looking ahead, 34% of our
industrial/flex properties are located within a mile of
Fort Belvoir, virginia, where the u.S. government is
embarking on a major expansion.
During 2009, we continued to prune the portfolio
to eliminate properties in areas where we see less growth
potential. In July 2009, WRIT completed the sale of
the Tech 100 Industrial park in Elkridge, maryland, for
$10.5 million, achieving a net book gain of $4.2 million;
and, in november 2009, we completed the sale of
the Crossroads Distribution Center, also in Elkridge,
for $4.4 million, and a net book gain of $1.5 million.
We believe the portfolio is well positioned for the
economic upturn.
The federal government’s
presence in the D.C. region
helped soften the overall impact
of the economic downturn in
our industrial/flex portfolio.
A diversified investment strategy
albeMarle pOint, va
9950 bUSineSS parkWaY, Md
alban bUSineSS center, va
10 Annual Report 2009 Retail
lanSdOWne Medical OFFice bUilding, va
WOOdHOlMe Medical OFFice bUilding, Md
An ability to identify opportunities
WRIT acquired its first medical office buildings in 1998
with the acquisition of Woodburn medical park I and II
in annandale, virginia. The Woodburn complex, located
within walking distance of the nationally recognized Inova
Fairfax hospital, continues to be a top performer.
In 2003, recognizing the potential of this sector, we began
assembling the medical office portfolio in earnest. Today it
encompasses 18 properties representing 1.3 million square
feet—all situated in areas with strong demographics and/or
proximate to dynamic health care centers. a keen insight
into the local markets has enabled us to identify key
opportunities in this sector and, today, we believe WRIT
has the only substantial medical office portfolio in the
Washington, D.C. region. The results: Even in the most
challenging economic environments, our medical office
portfolio has enjoyed high occupancies and solid rental rate
growth. The medical portfolio continued to deliver strong
performance, with economic occupancy of 92.7% in the
fourth quarter of 2009.
The Woodholme medical Office Building (shown above)
exemplifies our approach. Situated in the affluent submarket
of pikesville/Owings mills, maryland, it is located within five
miles of two major hospitals—Sinai hospital and northwest
hospital—and easily accessible to public transportation
and to I-695.
Our most recent acquisition, lansdowne medical Office
Building, is also pictured here. a newly constructed four-story,
Class a office building, lansdowne sits across from Inova
loudoun hospital in leesburg, virginia. We acquired the
property in august 2009 for $19.9 million and signed our
first lease at the building in the fourth quarter of 2009.
Through a keen insight into the
market, we’ve assembled the only
substantial medical office portfolio
in the Washington, D.C. region.
Properties Annual Report 2009
11
tHe 800 blOck OF SOUtH WaSHingtOn Street, va
WeStMinSter SHOpping center, Md
A focus on stability and consistency
Our retail portfolio consists of 14 shopping centers in
infill locations with strong demographics and high traffic
volumes. Twelve of these are neighborhood or grocery-
anchored centers, and two of them are the dominant
power centers in their respective region, attracting shoppers
on a routine basis for necessity-oriented retail. That profile
has enabled the portfolio to perform well, even in the
challenging environment of 2009. In the fourth quarter of
2009, portfolio economic occupancy was 94.4%, a significant
achievement in the most difficult retail environment in
recent history.
led by an experienced leasing team, during the year
we executed leases for a total of 146,000 square feet of
space in the retail sector. WRIT had only one significant
vacancy across the retail portfolio in 2009, at the Centre
at hagerstown, maryland, and by the fourth quarter, we
had filled that vacancy as well as managed upcoming lease
expirations by executing several renewals for a 69%
retention rate.
The portfolio’s stability is directly related to the
strength of our locations, an ear-to-the-ground ability
to manage the properties effectively and our focus on
necessity-oriented retail. Shown here, as examples, are
two WRIT centers: Westminster Shopping Center,
anchored by a major supermarket and located on the
area’s main thoroughfare, and The 800 Block of South
Washington Street, in the pedestrian-friendly center of
historic Old Town alexandria, virginia.
The stability of the retail
portfolio derives from a
concentration on infill
locations in high-traffic areas
with strong demographics.
12 Annual Report 2009 Properties
2009 Form 10-K
Form 10-K/A (Amendment No. 1)
United States Securities and Exchange Commission, Washington, DC 20549
n
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For fiscal year ended December 31, 2009
or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Commission file number 1-6622
Washington Real Estate Investment Trust
(Exact name of registrant as specified in its charter)
State of incorporation
IRS Employer Identification Number
Address of principal executive office
Zip code
Registrant’s telephone number, including area code
Maryland
53-0261100
6110 Executive Boulevard,
Suite 800,
Rockville, Maryland
20852
(301) 984-9400
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act
Shares of Beneficial Interest
New York Stock Exchange
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
YES X
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act.
NO X
YES
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past ninety (90) days.
YES X
NO
Indicate by checkmark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files).
YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant’s
knowledge in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company. See definition of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X
reporting company
Non-accelerated filer
Accelerated filer
Smaller
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES
NO X
As of June 30, 2009, the aggregate market value of such shares held by non-affiliates of the
registrant was approximately $1,293,242,069 (based on the closing price of the stock on
June 30, 2009).
As of February 25, 2010, 59,818,318 common shares were outstanding.
Documents Incorporated by Reference
Portions of our definitive Proxy Statement relating to the 2010 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in
Part III, Items 10-14 of this Annual Report on Form 10-K as indicated herein.
16
Annual Report 2009
Form 10-k
Index
Part I
Page
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 4.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Part II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Part III
Item 10.
Directors and Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters and Director Independence . . . . . . . . . . . . . . . . 58
Item 13.
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Part IV
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Form 10-k Washington Real Estate Investment Trust
17
Part I
Item 1. Business
WRIT Overview
Washington Real Estate Investment Trust (“we” or “WRIT”) is a self-administered, self-
managed, equity real estate investment trust (“REIT”) successor to a trust organized in
1960. Our business consists of the ownership and operation of income-producing real
property in the greater Washington metro region. We own a diversified portfolio of
office buildings, medical office buildings, industrial/flex properties, multifamily buildings
and retail centers.
We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue
Code and intend to continue to qualify as such. To maintain our status as a REIT, we
are required to distribute 90% of our ordinary taxable income to our shareholders.
When selling properties, we have the option of (a) reinvesting the sales proceeds of
properties sold, allowing for a deferral of income taxes on the sale, (b) paying out
capital gains to the shareholders with no tax to us or (c) treating the capital gains
as having been distributed to our shareholders, paying the tax on the gain deemed
distributed and allocating the tax paid as a credit to our shareholders.
Over the last five years, dividends paid per share have been $1.73 for 2009, $1.72 for
2008, $1.68 for 2007, $1.64 for 2006 and $1.60 for 2005.
Our geographic focus is based on two principles:
1. Real estate is a local business and is more effectively selected and managed by
owners located, and with expertise, in the region.
2. Geographic markets deserving of focus must be among the nation’s best markets
with a strong primary industry foundation and diversified enough to withstand
downturns in their primary industry.
We consider markets to be local if they can be reached from Washington within
two hours by car. While we have historically focused most of our investments in the
greater Washington metro region, in order to maximize acquisition opportunities
we will consider investments within the two-hour radius described above. We also
may consider opportunities to duplicate our Washington-focused approach in other
geographic markets which meet the criteria described above.
All of our officers and employees live and work in the greater Washington metro
region and all but one of our officers have over 20 years of experience in this region.
18
Annual Report 2009
Form 10-k
This section includes or refers to certain forward-looking statements. You should
refer to the explanation of the qualifications and limitations on such forward-looking
statements beginning on page 55.
The Greater Washington Metro Area Economy
In 2009, the national economic recession negatively affected the Washington metro
region, evidenced by negative job growth and a decrease in gross regional product
(“GRP”). Current estimates by Delta Associates / Transwestern Commercial Services
(“Delta”), a national full service real estate firm that provides market research and
evaluation services for commercial property, indicate that the Washington metro region
lost 24,000 jobs in twelve months ending October 2009. The region’s unemployment
rate was 6.2% at October 2009, up from 4.1% in the prior year. However, it still
remains the lowest rate among all of the nation’s largest metro areas. In addition, the
region’s unemployment rate is well below the national average of 10.0% in November
2009. The government, education/health and professional/business services sectors
experienced positive job growth, while the other sectors recorded job losses. The
Center for Regional Analysis at George Mason University (“CRA”) estimates that the
Washington area’s GRP decreased by 0.5% in 2009, which is less severe than the
estimated national decline of 2.5%. Approximately one-third of the area’s GRP was
generated by the federal government.
CRA expects growth in the Washington metro region to be slow as the region and
the nation recover from the severe economic conditions. According to CRA, the
Washington Leading Index, which forecasts area economic performance over the next
18 months, is 107.0, as of September 2009, which is above the 20-year average of 102.6.
CRA also forecasts GRP for the Washington metro region to increase by 2.7% in 2010.
This compares to a national GRP projection of 2.5%. CRA forecasts job growth in the
region to increase in 2010 and 2011, adding 24,900 and 34,900 new jobs, respectively,
compared to the 15-year annual average of 52,100.
Greater Washington Metro Region Real Estate Markets
The Association of Foreign Investors in Real Estate (“AFIRE”) has publicized that it
now considers Washington, DC as the top U.S. city for real estate investment. The
area’s economy has translated into stronger relative real estate market performance in
each of our segments, compared to other national metropolitan regions, as reported
by Delta. Despite our region’s strength in comparison to other metropolitan regions,
we believe the potential exists in the current economic environment for continued
downward pressure on rents in 2010. Market statistics and information from Delta are
set forth below:
Office and Medical Office Sectors
• Average effective rents decreased 6.9% in 2009 in the region compared to an
increase of 0.1% in 2008.
• Vacancy was 13.0% at year-end 2009, up from 10.6% at year-end 2008 and 9.1%
at year-end 2007.
• The region has the fourth lowest vacancy rate of large metro areas in the
United States.
• Net absorption (defined as the change in occupied, standing inventory from one
period to the next) totaled 0.6 million square feet in 2009, down from 3.4 million
square feet in 2008 and a 7.5 million square foot long-term average.
• Of the 5.7 million square feet of office space under construction at year-end
2009 (down from 15.4 million square feet at year-end 2008), 48% is pre-leased
compared to 26% one year ago.
Retail Sector
• Rental rates at grocery-anchored centers decreased 5.8% in the region in 2009,
from the 1.7% increase in 2008.
• Vacancy rates increased to 5.6% at year-end 2009 from 3.7% at year-end 2008.
• Total retail sales decreased by 7% in 2009 as compared to a 3% decrease
in 2008.
Multifamily Sector
• Rents for all investment grade apartments decreased 2.0% in the greater
Washington metro region during 2009. Class A rents declined by 1.7% in 2009
compared to growth of 0.1% in 2008.
• The vacancy rate for all apartments was 4.3% at year-end 2009, the same as
year-end 2008. The national rate was 7.6% at year-end 2009, which places the
Washington metro region as one of the lowest vacancy rates of any metro area
in the nation. Class A vacancy decreased to 3.6% at year-end 2009 from 4.4% at
year-end 2008.
Industrial/Flex Sector
• Rental rates for the industrial sector decreased 4.3% in the Washington metro
region in 2009 compared to an increase of 0.3% in 2008.
• Overall vacancy was 11.4% at year-end 2009, up from 10.1% at year-end 2008.
• Net absorption was a negative 2.3 million square feet, compared to a positive
4.4 million square feet in 2008.
• Of the 1.1 million square feet of industrial space under construction at year-end
2009, 41% was pre-leased, compared to 30% of space under construction that
was pre-leased at year-end 2008.
Our Portfolio
As of December 31, 2009, we owned a diversified portfolio of 90 properties consisting
of 27 office properties, 18 medical office properties, 14 retail centers, 11 multifamily
properties, 20 industrial/flex properties and land for development. Our principal
objective is to invest in high quality properties in prime locations, then proactively
manage, lease and direct ongoing capital improvement programs to improve their
economic performance. The percentage of total real estate rental revenue by property
group for 2009, 2008 and 2007, and the percent leased, calculated as the percentage of
physical net rentable area leased, as of December 31, 2009, were as follows:
Percent Leased1
December 31, 2009
91%
89%2
96%
96%
85%
Office
Medical office
Retail
Multifamily
Industrial
Real Estate Rental Revenue1
2008
42%
16
15
13
14
100%
2009
44%
15
14
15
12
100%
2007
41%
15
17
13
14
100%
1 Data excludes discontinued operations.
2
reflects the acquisition of Lansdowne Medical office Building during the third quarter of 2009. This property was
vacant as of December 31, 2009.
On a combined basis, our commercial portfolio (i.e. our office, medical office, retail and
industrial properties, but not our multifamily properties) was 90% leased at December 31,
2009, 94% leased at December 31, 2008 and 97% leased at December 31, 2007.
The commercial lease expirations for the next five years are as follows:
2010
2011
2012
2013
2014
2015 and thereafter
Total
Number
of Leases
297
292
212
175
143
351
1,470
Square Feet
1,550,000
1,489,000
1,187,000
1,300,000
1,073,000
2,943,000
9,542,000
Gross
Annual Rent
$ 33,409,000
33,552,000
26,688,000
28,369,000
28,935,000
90,308,000
$241,261,000
Percentage of
Total Gross
Annual Rent
14%
14
11
12
12
37
100%
Total real estate rental revenue from continuing operations was $306.9 million for
2009, $278.7 million for 2008 and $248.9 million for 2007. During the three year period
ended December 31, 2009, we acquired four office buildings, six medical office buildings,
one multifamily building and two industrial/flex properties. We also placed into service
from development one office building and two multifamily buildings. During that same
time frame, we sold three office buildings, one multifamily building and four industrial/
Form 10-k Washington Real Estate Investment Trust
19
flex properties. These acquisitions and dispositions were the primary reason for the
shifting of each group’s percentage of total real estate rental revenue reflected above.
No single tenant accounted for more than 3.2% of real estate rental revenue in 2009,
3.5% of revenue in 2008 and 3.6% of revenue in 2007. All federal government tenants
in the aggregate accounted for approximately 2.0% of our 2009 total revenue. Federal
government tenants include the Department of Defense, U.S. Patent and Trademark
Office, Federal Bureau of Investigation, Office of Personnel Management, Secret
Service, Federal Aviation Administration, NASA and the National Institutes of Health.
Our larger non-federal government tenants include the World Bank, The Advisory
Board Company, INOVA Health System, IBM Corporation, Patton Boggs LLP, Sunrise
Senior Living, Inc., URS Corporation, Lafarge North America, Inc., and Children’s
National Medical Center.
We expect to continue investing in additional income-producing properties. We invest
in properties which we believe will increase in income and value. Our properties
typically compete for tenants with other properties throughout the respective areas in
which they are located on the basis of location, quality and rental rates.
In prior years, we have been engaged in significant ground-up development in order
to further strengthen our portfolio with long-term growth prospects. In 2007 and
2008, we completed construction on three ground-up development projects. The first
was Bennett Park, a 224-unit multifamily property located in Arlington, VA, with the
majority of units delivered by the end of 2007. The second development project was
The Clayborne Apartments, a 74-unit multifamily property located in Alexandria, VA.
All of the units at Clayborne were delivered during the first quarter of 2008. Bennett
Park and Clayborne were 98% and 95% leased, respectively, at December 31, 2009.
The third development project was Dulles Station, a Class A office property located in
Herndon, VA. Dulles Station is entitled for two office buildings totaling 540,000 square
feet. The first 180,000 square foot office building was completed in the third quarter
2007, and was 91% leased at December 31, 2009. Construction of the 360,000 square
foot second building remains in the planning phase.
We make capital improvements on an ongoing basis to our properties for the purpose
of maintaining and increasing their value and income. Major improvements and/or
renovations to the properties in 2009, 2008, and 2007 are discussed under the heading
“Capital Improvements and Development Costs.”
Further description of the property groups is contained in Item 2, Properties and in
Schedule III. Reference is also made to Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
On February 25, 2010, we had 301 employees including 226 persons engaged in
property management functions and 75 persons engaged in corporate, financial, leasing,
asset management and other functions.
Tax Treatment of Recent Disposition Activity
We sold several properties during the three year period ended December 31, 2009.
All disclosed gains on sale are calculated in accordance with U.S. generally accepted
accounting principles (“GAAP”).
In May 2009, we sold a multifamily property, Avondale Apartments, for a gain of
$6.7 million. In July 2009, we sold an industrial property, Tech 100 Industrial Park, for
a gain of $4.1 million. In July 2009, we sold an office property, Brandywine Center,
for a gain of $1.0 million. In November 2009, we sold another industrial property,
Crossroads Distribution Center, for a gain of $1.5 million. The capital gains from the
sales were paid out to shareholders.
In June 2008, we sold two industrial properties, Sullyfield Center and The Earhart
Building, for a gain of $15.3 million. The capital gains from the sales were paid out
to shareholders.
In September 2007, we sold two office properties, Maryland Trade Centers I and
II, for a gain of $25.0 million. The proceeds from the sales were reinvested in
replacement properties.
We distributed all of our 2009, 2008 and 2007 ordinary taxable income to our
shareholders. No provision for income taxes was necessary in 2009, 2008 or 2007.
Availability of Reports
Copies of this Annual Report on Form 10-K, as well as our Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are
available, free of charge, on the Internet on our website www.writ.com. All required
reports are made available on the website as soon as reasonably practicable after they
are electronically filed with or furnished to the Securities and Exchange Commission.
The reference to our website address does not constitute incorporation by reference
of the information contained in the website and such information should not be
considered part of this document.
Item 1A. Risk Factors
Set forth below are the risks that we believe are material to our shareholders. We refer to
the shares of beneficial interest in WrIT as our “common shares,” and the investors who
own shares as our “shareholders.” This section includes or refers to certain forward-looking
statements. You should refer to the explanation of the qualifications and limitations on such
forward-looking statements beginning on page 55.
20
Annual Report 2009
Form 10-k
Further disruptions in the financial markets could affect our ability to obtain financing
or have other adverse effects on us or the market price of our common shares.
• vacancies, changes in market rental rates and the need to periodically repair,
renovate and re-let space;
The United States and global equity and credit markets recently experienced
significant price volatility and liquidity disruptions which caused the market prices of
stocks to fluctuate substantially and the spreads on prospective debt financings to
widen considerably. These circumstances significantly negatively impacted liquidity in
the financial markets, making terms for certain financings less attractive or unavailable.
Further disruption in the equity and credit markets could negatively impact our ability to
access additional financing at reasonable terms or at all. If such further disruption were
to occur, in the event of a debt financing, our cost of borrowing in the future would
likely be significantly higher than historical levels. As well, in the case of a common
equity financing, the disruptions in the financial markets could have a material adverse
effect on the market value of our common shares, potentially requiring us to issue
more shares than we would otherwise have issued with a higher market value for our
common shares. Further disruption in the financial markets also could negatively affect
our ability to make acquisitions, undertake new development projects and refinance
our debt. As well, it could also make it more difficult for us to sell properties and could
adversely affect the price we receive for properties that we do sell, as prospective
buyers experience increased costs of financing and difficulties in obtaining financing.
Further disruptions in the financial markets also could adversely affect many of our
tenants and their businesses, including their ability to pay rents when due and renew
their leases at rates at least as favorable as their current rates. As well, our ability to
attract prospective new tenants in the future could be adversely affected by disruption
in the financial markets.
Our performance and value are subject to risks associated with our real estate
assets and with the real estate industry.
Our economic performance and the value of our real estate assets are subject to the
risk that if our office, medical office, retail, multifamily and industrial properties do not
generate revenues sufficient to meet our operating expenses, debt service and capital
expenditures, our cash flow and ability to pay distributions to our shareholders will be
adversely affected. The following factors, among others, may adversely affect the cash
flow generated by our commercial and multifamily properties:
• downturns in the national, regional and local economic climate;
• the economic health of our tenants and the ability to collect rents;
• consumer confidence, unemployment rates, and consumer tastes and preferences;
• competition from similar asset type properties;
• local real estate market conditions, such as oversupply or reduction in demand
• increased operating costs, including insurance premiums, utilities and real
estate taxes;
• inflation;
• civil disturbances, earthquakes and other natural disasters, terrorist acts or acts
of war; and
• decreases in the underlying value of our real estate.
We are dependent upon the economic climate of the Washington metropolitan region.
All of our properties are located in the Washington metropolitan region, which may
expose us to a greater amount of market dependent risk than if we were geographically
diverse. General economic conditions and local real estate conditions in our geographic
region may be dependent upon one or more industries, thus a downturn in one of the
industries may have a particularly strong effect. In particular, economic conditions in
our market are directly affected by federal government spending in the region. In the
event of reduced federal spending or negative economic changes in our region, we may
experience a negative impact to our profitability and may be limited in our ability to
make distributions to our shareholders.
We face risks associated with property acquisitions.
We intend to continue to acquire properties which would continue to increase our
size and could alter our capital structure. Our acquisition activities and results may be
exposed to the following risks:
• we may be unable to finance acquisitions on favorable terms;
• acquired properties may fail to perform as we expected in analyzing our
investments;
• we may be unable to acquire a desired property because of competition from
other real estate investors, including publicly traded real estate investment trusts,
institutional investment funds and private investors;
• even if we enter into an acquisition agreement for a property, it is subject
to customary conditions to closing, including completion of due diligence
investigations which may have findings that are unacceptable;
• even if we enter into an acquisition agreement for a property, we may be unable
to complete that acquisition after making a non-refundable deposit and incurring
certain other acquisition-related costs;
• we may be unable to quickly and efficiently integrate new acquisitions, particularly
acquisitions of portfolios of properties, into our existing operations;
• competition from other real estate investors may significantly increase the
for office, medical office, retail, multifamily and industrial properties;
purchase price; and
• changes in interest rates and availability of financing;
Form 10-k Washington Real Estate Investment Trust
21
• our estimates of capital expenditures required for an acquired property, including
the costs of repositioning or redeveloping, may be inaccurate.
We may acquire properties subject to liabilities and without recourse, or with limited
recourse with respect to unknown liabilities. As a result, if liability were asserted against
us based upon the acquisition of a property, we may have to pay substantial sums to
settle it, which could adversely affect our cash flow. Unknown liabilities with respect to
properties acquired might include:
• liabilities for clean-up of undisclosed environmental contamination;
• claims by tenants, vendors or other persons dealing with the former owners of
the properties;
• liabilities incurred in the ordinary course of business; and
• claims for indemnification by general partners, directors, officers and others
indemnified by the former owners of the properties.
We face potential difficulties or delays renewing leases or re-leasing space.
From 2010 through 2014, leases on our commercial properties will expire on a total of
approximately 69% of our leased square footage as of December 31, 2009, with leases
on approximately 16% of our leased square footage expiring in 2010, 16% in 2011, 12% in
2012, 14% in 2013 and 11% in 2014. We derive substantially all of our income from rent
received from tenants. If our tenants decide not to renew their leases, we may not be
able to re-let the space. If tenants decide to renew their leases, the terms of renewals,
including the cost of required improvements or concessions, may be less favorable
than current lease terms. Multifamily properties are leased under operating leases with
terms of generally one year or less. For the years ended 2009, 2008 and 2007, the
multifamily tenant retention rate was 54% , 67% and 68%, respectively. Similar to our
commercial properties, if our multifamily tenants decide not to renew their leases, we
may not be able to re-let the space, or the terms of the renewal may be less favorable
than current lease terms. As a result of the foregoing, our cash flow could decrease and
our ability to make distributions to our shareholders could be adversely affected.
We face potential adverse effects from major tenants’ bankruptcies or insolvencies.
The bankruptcy or insolvency of a major tenant may adversely affect the income produced
by a property. For example, during the fourth quarter of 2008, the bankruptcy of a large
retail tenant caused a loss of approximately $1.0 million. In light of the current economic
recession, it is possible that additional major tenants could file for bankruptcy protection or
become insolvent in the future. We cannot evict a tenant solely because of its bankruptcy.
On the other hand, a court might authorize the tenant to reject and terminate its lease. In
such case, our claim against the bankrupt tenant for unpaid, future rent would be subject
to a statutory cap that might be substantially less than the remaining rent actually owed
under the lease. As a result, our claim for unpaid rent would likely not be paid in full. This
shortfall could adversely affect our cash flow and results from operations.
If a tenant experiences a downturn in its business or other types of financial distress,
it may be unable to make timely rental payments. By way of illustration, provision for
losses on accounts receivable from continuing operations increased to $6.7 million in
2009, from $4.2 million in 2008 and $1.9 million in 2007. This unfavorable trend could
continue or worsen in 2010 and forward.
We face risks associated with property development.
Developing properties present a number of risks for us, including risks that:
• if we are unable to obtain all necessary zoning and other required governmental
permits and authorizations or cease development of the project for any other
reason, the development opportunity may be abandoned after expending
significant resources, resulting in the loss of deposits or failure to recover expenses
already incurred;
• the development and construction costs of the project may exceed original
estimates due to increased interest rates and increased cost of materials, labor,
leasing or other expenditures, which could make the completion of the project
less profitable because market rents may not increase sufficiently to compensate
for the increase in construction costs;
• construction and/or permanent financing may not be available on favorable terms
or may not be available at all, which may cause the cost of the project to increase
and lower the expected return;
• the project may not be completed on schedule as a result of a variety of factors,
many of which are beyond our control, such as weather, labor conditions and
material shortages, which would result in increases in construction costs and debt
service expenses; and
• occupancy rates and rents at the newly completed property may not meet the
expected levels and could be insufficient to make the property profitable.
Properties developed or acquired for development may generate little or no cash
flow from the date of acquisition through the date of completion of development. In
addition, new development activities, regardless of whether or not they are ultimately
successful, may require a substantial portion of management’s time and attention.
These risks could result in substantial unanticipated delays or expenses and, under
certain circumstances, could prevent completion of development activities once
undertaken, any of which could have an adverse effect on our financial condition,
results of operations, or ability to satisfy our debt service obligations.
Our properties face significant competition.
We face significant competition from developers, owners and operators of office,
medical office, retail, multifamily, industrial and other commercial real estate.
Substantially all of our properties face competition from similar properties in the same
22
Annual Report 2009
Form 10-k
market. Such competition may affect our ability to attract and retain tenants and may
reduce the rents we are able to charge. These competing properties may have vacancy
rates higher than our properties, which may result in their owners being willing to make
space available at lower rents than the space in our properties.
We face risks associated with the use of debt, including refinancing risk.
We rely on borrowings under our credit facilities and offerings of debt securities to
finance acquisitions and development activities and for general corporate purposes.
The commercial real estate debt markets recently experienced significant volatility due
to a number of factors, including the tightening of underwriting standards by lenders and
credit rating agencies and the reported significant inventory of unsold mortgage backed
securities in the market. The volatility resulted in investors decreasing the availability
of debt financing as well as increasing the cost of debt financing. While the commercial
real estate debt markets have begun to improve, we believe that circumstances could
arise in which we may not be able to obtain debt financing in the future on favorable
terms, or at all. If we were unable to borrow under our credit facilities or to refinance
existing debt financing, our financial condition and results of operations would likely be
adversely affected.
We are subject to the risks normally associated with debt, including the risk that our
cash flow may be insufficient to meet required payments of principal and interest. We
anticipate that only a small portion of the principal of our debt will be repaid prior
to maturity. Therefore, we are likely to need to refinance a significant portion of our
outstanding debt as it matures. There is a risk that we may not be able to refinance
existing debt or that the terms of any refinancing will not be as favorable as the terms of
the existing debt. If principal payments due at maturity cannot be refinanced, extended
or repaid with proceeds from other sources, such as new equity capital, our cash flow
may not be sufficient to repay all maturing debt in years when significant “balloon”
payments come due.
Our degree of leverage could limit our ability to obtain additional financing or affect
the market price of our common shares or debt securities.
On February 25, 2010, our total consolidated debt was approximately $1.2 billion.
Consolidated debt to consolidated market capitalization ratio, which measures total
consolidated debt as a percentage of the aggregate of total consolidated debt plus
the market value of outstanding equity securities, is often used by analysts to gauge
leverage for equity REITs such as us. Our market value is calculated using the price
per share of our common shares. Using the closing share price of $27.92 per share of
our common shares on February 25, 2010, multiplied by the number of our common
shares, our consolidated debt to total consolidated market capitalization ratio was
approximately 42% as of February 25, 2010.
Our degree of leverage could affect our ability to obtain additional financing for working
capital, capital expenditures, acquisitions, development or other general corporate
purposes. Our senior unsecured debt is currently rated investment grade by the two
major rating agencies. However, there can be no assurance that we will be able to
maintain this rating, and in the event our senior debt is downgraded from its current
rating, we would likely incur higher borrowing costs and/or difficulty in obtaining
additional financing. Our degree of leverage could also make us more vulnerable to a
downturn in business or the economy generally. There is a risk that changes in our debt
to market capitalization ratio, which is in part a function of our share price, or our ratio
of indebtedness to other measures of asset value used by financial analysts may have an
adverse effect on the market price of our equity or debt securities.
Rising interest rates would increase our interest costs.
We may incur indebtedness that bears interest at variable rates. Accordingly, if interest
rates increase, so will our interest costs, which could adversely affect our cash flow
and our ability to service debt. As a protection against rising interest rates, we may
enter into agreements such as interest rate swaps, caps, floors and other interest rate
exchange contracts. These agreements, however, increase our risks that other parties
to the agreements may not perform or that the agreements may be unenforceable.
Covenants in our debt agreements could adversely affect our financial condition.
Our credit facilities contain customary restrictions, requirements and other limitations
on our ability to incur indebtedness. We must maintain a minimum tangible net worth
and certain ratios, including a maximum of total liabilities to total gross asset value, a
maximum of secured indebtedness to gross asset value, a minimum of annual EBITDA
to fixed charges, a minimum of unencumbered asset value to unsecured indebtedness,
a minimum of net operating income from unencumbered properties to unsecured
interest expense and a maximum of permitted investments to gross asset value. Our
ability to borrow under our credit facilities is subject to compliance with our financial
and other covenants. The recent economic downturn may adversely affect our ability
to comply with these financial and other covenants.
Failure to comply with any of the covenants under our unsecured credit facilities
or other debt instruments could result in a default under one or more of our debt
instruments. This could cause our lenders to accelerate the timing of payments and/or
prohibit future borrowings, either of which would have a material adverse effect on our
business, operations, financial condition and liquidity.
We face risks associated with short-term liquid investments.
We have significant cash balances from time to time that we invest in a variety of
short-term investments that are intended to preserve principal value and maintain
Form 10-k Washington Real Estate Investment Trust
23
a high degree of liquidity while providing current income. From time to time, these
investments may include (either directly or indirectly):
• direct obligations issued by the U.S. Treasury;
• obligations issued or guaranteed by the U.S. government or its agencies;
• taxable municipal securities;
• obligations (including certificates of deposit) of banks and thrifts;
• commercial paper and other instruments consisting of short-term U.S. dollar
denominated obligations issued by corporations and banks;
• repurchase agreements collateralized by corporate and asset-backed obligations;
• both registered and unregistered money market funds; and
• other highly rated short-term securities.
Investments in these securities and funds are not insured against loss of principal. Under
certain circumstances we may be required to redeem all or part of our investment,
and our right to redeem some or all of our investment may be delayed or suspended.
In addition, there is no guarantee that our investments in these securities or funds will
be redeemable at par value. A decline in the value of our investment or a delay or
suspension of our right to redeem may have a material adverse effect on our results of
operations or financial condition.
Further issuances of equity securities may be dilutive to current shareholders.
The interests of our existing shareholders could be diluted if additional equity securities
are issued, including to finance future developments and acquisitions, instead of incurring
additional debt. Our ability to execute our business strategy depends on our access to
an appropriate blend of debt financing, including unsecured lines of credit and other
forms of secured and unsecured debt, and equity financing.
Compliance or failure to comply with the Americans with Disabilities Act and other
laws and regulations could result in substantial costs.
The Americans with Disabilities Act generally requires that public buildings, including
commercial and multifamily properties, be made accessible to disabled persons.
Noncompliance could result in imposition of fines by the federal government or the
award of damages to private litigants. If, pursuant to the Americans with Disabilities
Act, we are required to make substantial alterations and capital expenditures in one
or more of our properties, including the removal of access barriers, it could adversely
affect our results of operations.
We may also incur significant costs complying with other regulations. Our properties
are subject to various federal, state and local regulatory requirements, such as state
and local fair housing, rent control and fire and life safety requirements. If we fail
to comply with these requirements, we may incur fines or private damage awards.
We believe that our properties are currently in material compliance with regulatory
requirements. However, we do not know whether existing requirements will change
or whether compliance with future requirements will require significant unanticipated
expenditures that will adversely affect our results of operations.
Some potential losses are not covered by insurance.
We carry insurance coverage on our properties of types and in amounts that we
believe are in line with coverage customarily obtained by owners of similar properties.
We believe all of our properties are adequately insured. The property insurance that
we maintain for our properties has historically been on an “all risk” basis, which is in
full force and effect until renewal in September 2010. There are other types of losses,
such as from wars or catastrophic events, for which we cannot obtain insurance at all
or at a reasonable cost.
We have an insurance policy which has no terrorism exclusion, except for non-certified
nuclear, chemical and biological acts of terrorism. Our financial condition and results of
operations are subject to the risks associated with acts of terrorism and the potential
for uninsured losses as the result of any such acts. Effective November 26, 2002, under
this existing coverage, any losses caused by certified acts of terrorism would be partially
reimbursed by the United States under a formula established by federal law. Under
this formula the United States pays 85% of covered terrorism losses exceeding the
statutorily established deductible paid by the insurance provider, and insurers pay 10%
until aggregate insured losses from all insurers reach $100 billion in a calendar year.
If the aggregate amount of insured losses under this program exceeds $100 billion
during the applicable period for all insured and insurers combined, then each insurance
provider will not be liable for payment of any amount which exceeds the aggregate
amount of $100 billion. On December 26, 2007, the Terrorism Risk Insurance Program
Reauthorization Act of 2007 was signed into law and extends the program through
December 31, 2014. We continue to monitor the state of the insurance market in
general, and the scope and costs of coverage for acts of terrorism in particular, but we
cannot anticipate what amount of coverage will be available on commercially reasonable
terms in future policy years.
In the event of an uninsured loss or a loss in excess of our insurance limits, we could
lose both the revenues generated from the affected property and the capital we have
invested in the affected property. Depending on the specific circumstances of the
affected property it is possible that we could be liable for any mortgage indebtedness
or other obligations related to the property. Any such loss could adversely affect our
business and financial condition and results of operations.
We have to renew our policies in most cases on an annual basis and negotiate acceptable terms
for coverage, exposing us to the volatility of the insurance markets, including the possibility
of rate increases. Any material increase in insurance rates or decrease in available coverage
in the future could adversely affect our results of operations and financial condition.
24
Annual Report 2009
Form 10-k
Actual or threatened terrorist attacks may adversely affect our ability to generate
revenues and the value of our properties.
Environmental laws also govern the presence, maintenance and removal of asbestos.
Such laws require that owners or operators of buildings containing asbestos:
All of our properties are located in or near Washington D.C., a metropolitan area that
has been and may in the future be the target of actual or threatened terrorism attacks.
As a result, some tenants in our market may choose to relocate their businesses to
other markets. This could result in an overall decrease in the demand for commercial
space in this market generally, which could increase vacancies in our properties or
necessitate that we lease our properties on less favorable terms, or both. In addition,
future terrorist attacks in or near Washington D.C. could directly or indirectly damage
our properties, both physically and financially, or cause losses that materially exceed our
insurance coverage. As a result of the foregoing, our ability to generate revenues and
the value of our properties could decline materially.
Potential liability for environmental contamination could result in substantial costs.
Under federal, state and local environmental laws, ordinances and regulations, we may
be required to investigate and clean up the effects of releases of hazardous or toxic
substances or petroleum products at our properties, regardless of our knowledge or
responsibility, simply because of our current or past ownership or operation of the real
estate. In addition, the U.S. Environmental Protection Agency, the U.S. Occupational
Safety and Health Administration and other state and local governmental authorities
are increasingly involved in indoor air quality standards, especially with respect to
asbestos, mold, medical waste and lead-based paint. The clean up of any environmental
contamination, including asbestos and mold, can be costly. If environmental problems
arise, we may have to make substantial payments which could adversely affect our
financial condition and results of operations because:
• as owner or operator we may have to pay for property damage and for
investigation and clean-up costs incurred in connection with the contamination;
• the law typically imposes clean-up responsibility and liability regardless of whether
the owner or operator knew of or caused the contamination;
• even if more than one person may be responsible for the contamination, each
person who shares legal liability under the environmental laws may be held
responsible for all of the clean-up costs; and
• governmental entities and third parties may sue the owner or operator of a
contaminated site for damages and costs.
These costs could be substantial and in extreme cases could exceed the value of the
contaminated property. The presence of hazardous or toxic substances or petroleum
products or the failure to properly remediate contamination may adversely affect
our ability to borrow against, sell or rent an affected property. In addition, applicable
environmental laws create liens on contaminated sites in favor of the government for
damages and costs it incurs in connection with a contamination.
• properly manage and maintain the asbestos;
• notify and train those who may come into contact with asbestos; and
• undertake special precautions, including removal or other abatement, if asbestos
would be disturbed during renovation or demolition of a building.
Such laws may impose fines and penalties on building owners or operators who fail to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos fibers.
It is our policy to retain independent environmental consultants to conduct Phase I
environmental site assessments and asbestos surveys with respect to our acquisition of
properties. These assessments generally include a visual inspection of the properties and
the surrounding areas, an examination of current and historical uses of the properties and
the surrounding areas and a review of relevant state, federal and historical documents.
However, they do not always involve invasive techniques such as soil and ground water
sampling. Where appropriate, on a property-by-property basis, our general practice
is to have these consultants conduct additional testing. However, even though these
additional assessments may be conducted, there is still the risk that:
• the environmental assessments and updates did not identify all potential
environmental liabilities;
• a prior owner created a material environmental condition that is not known to us
or the independent consultants preparing the assessments;
• new environmental liabilities have developed since the environmental assessments
were conducted; and
• future uses or conditions or changes in applicable environmental laws and
regulations could result in environmental liability to us.
Failure to qualify as a REIT would cause us to be taxed as a corporation, which would
substantially reduce funds available for payment of dividends.
If we fail to qualify as a REIT for federal income tax purposes, we would be taxed as a
corporation. We believe that we are organized and qualified as a REIT and intend to
operate in a manner that will allow us to continue to qualify as a REIT. However, we
cannot assure you that we are qualified as such, or that we will remain qualified as such
in the future. This is because qualification as a REIT involves the application of highly
technical and complex provisions of the Internal Revenue Code as to which there are
only limited judicial and administrative interpretations and involves the determination of
facts and circumstances not entirely within our control. Future legislation, new regulations,
administrative interpretations or court decisions may significantly change the tax laws or
the application of the tax laws with respect to qualification as a REIT for federal income
tax purposes or the federal income tax consequences of such qualification.
Form 10-k Washington Real Estate Investment Trust
25
If we fail to qualify as a REIT we could face serious tax consequences that could
substantially reduce our funds available for payment of dividends for each of the years
involved because:
• we would not be allowed a deduction for dividends paid to shareholders in
computing our taxable income and could be subject to federal income tax at
regular corporate rates;
• we also could be subject to the federal alternative minimum tax and possibly
increased state and local taxes;
• unless we are entitled to relief under statutory provisions, we could not elect to
be subject to tax as a REIT for four taxable years following the year during which
we are disqualified; and
• all dividends would be subject to tax as ordinary income to the extent of our
current and accumulated earnings and profits potentially eligible as “qualified
dividends” subject to the 15% income tax rate.
In addition, if we fail to qualify as a REIT, we would no longer be required to pay
dividends. As a result of these factors, our failure to qualify as a REIT could have a
material adverse impact on our results of operations, financial condition and liquidity.
The market value of our securities can be adversely affected by many factors.
As with any public company, a number of factors may adversely influence the public
market price of our common shares. These factors include:
• level of institutional interest in us;
• perceived attractiveness of investment in us, in comparison to other REITs;
• attractiveness of securities of REITs in comparison to other asset classes taking
into account, among other things, that a substantial portion of REITs’ dividends
are taxed as ordinary income;
• our financial condition and performance;
• the market’s perception of our growth potential and potential future cash dividends;
• government action or regulation, including changes in tax law;
• increases in market interest rates, which may lead investors to expect a higher
annual yield from our distributions in relation to the price of our shares;
• changes in federal tax laws;
• changes in our credit ratings;
• relatively low trading volume of shares of REITs in general, which tends to
exacerbate a market trend with respect to our shares; and
• any negative change in the level of our dividend or the partial payment thereof in
common shares.
We cannot assure you we will continue to pay dividends at historical rates.
Our ability to continue to pay dividends on our common shares at historical rates
or to increase our common share dividend rate will depend on a number of factors,
including, among others, the following:
• our future financial condition and results of operations;
• the performance of lease terms by tenants;
• the terms of our loan covenants; and
• our ability to acquire, finance, develop or redevelop and lease additional
properties at attractive rates.
If we do not maintain or increase the dividend rate on our common shares in the
future, it could have an adverse effect on the market price of our common shares.
Provisions of the Maryland General Corporation Law, or the MGCL, may limit a
change in control.
There are several provisions of the Maryland General Corporation Law, or the MGCL,
that may limit the ability of a third party to undertake a change in control, including:
• a provision where a corporation is not permitted to engage in any business
combination with any “interested stockholder,” defined as any holder or affiliate
of any holder of 10% or more of the corporation’s stock, for a period of five years
after that holder becomes an “interested stockholder;” and
• a provision where the voting rights of “control shares” acquired in a “control
share acquisition,” as defined in the MGCL, may be restricted, such that the
“control shares” have no voting rights, except to the extent approved by a vote
of holders of two-thirds of the common shares entitled to vote on the matter.
These provisions may delay, defer, or prevent a transaction or a change in control
that may involve a premium price for holders of our shares or otherwise be in their
best interests.
Item 1B. Unresolved Staff Comments
None.
26
Annual Report 2009
Form 10-k
Item 2. Properties
The schedule on the following pages lists our real estate investment portfolio as of December 31, 2009, which consisted of 90 properties and land held for development.
As of December 31, 2009, the percent leased is the percentage of net rentable area for which fully executed leases exist and may include signed leases for space not yet occupied
by the tenant.
Cost information is included in Schedule III to our financial statements included in this Annual Report on Form 10-K.
Schedule of Properties
Properties
Office Buildings
1901 Pennsylvania Avenue
51 Monroe Street
515 King Street
The Lexington Building
The Saratoga Building
6110 Executive Boulevard
1220 19th Street
1600 Wilson Boulevard
7900 Westpark Drive
600 Jefferson Plaza
1700 Research Boulevard
Parklawn Plaza
Wayne Plaza
Courthouse Square
One Central Plaza
The Atrium Building
1776 G Street
Albemarle Point
6565 Arlington Blvd
West Gude Drive
The Ridges
The Crescent
Monument II
Woodholme Center
2000 M Street
Dulles Station
2445 M Street
Subtotal
Location
Washington, D.C.
Rockville, MD
Alexandria, VA
Rockville, MD
Rockville, MD
Rockville, MD
Washington, D.C.
Arlington, VA
McLean, VA
Rockville, MD
Rockville, MD
Rockville, MD
Silver Spring, MD
Alexandria, VA
Rockville, MD
Rockville, MD
Washington, D.C.
Chantilly, VA
Falls Church, VA
Rockville, MD
Gaithersburg, MD
Gaithersburg, MD
Herndon, VA
Pikesville, MD
Washington, D.C.
Herndon, VA
Washington, D.C.
Year
Acquired
Year
Constructed
Net Rentable
Square Feet*
Percent Leased
12/31/09
1977
1979
1992
1993
1993
1995
1995
1997
1997
1999
1999
1999
2000
2000
2001
2002
2003
2005
2006
2006
2006
2006
2007
2007
2007
2005
2008
1960
1975
1966
1970
1977
1971
1976
1973
1972/1986/1999
1985
1982
1986
1970
1979
1974
1980
1979
2001
1967/1998
1984/1986/1988
1990
1989
2000
1989
1971
2007
1986
97,000
210,000
76,000
46,000
58,000
198,000
102,000
166,000
523,000
112,000
101,000
40,000
91,000
113,000
267,000
80,000
263,000
89,000
140,000
276,000
104,000
49,000
205,000
73,000
227,000
180,000
290,000
4,176,000
96%
91%
97%
55%
72%
93%
88%
100%
96%
82%
97%
80%
94%
98%
77%
81%
100%
82%
78%
93%
100%
100%
97%
86%
89%
91%
100%
91%
Form 10-k Washington Real Estate Investment Trust
27
Schedule of Properties (continued)
Properties
Medical Office Buildings
Woodburn Medical Park I
Woodburn Medical Park II
Prosperity Medical Center I
Prosperity Medical Center II
Prosperity Medical Center III
Shady Grove Medical Village II
8301 Arlington Boulevard
Alexandria Professional Center
9707 Medical Center Drive
15001 Shady Grove Road
Plumtree Medical Center
15005 Shady Grove Road
2440 M Street
Woodholme Medical Office Bldg
Ashburn Farm Office Park
CentreMed I & II
Sterling Medical Office Building1
Lansdowne Medical Office Building1
Subtotal
Retail Centers
Takoma Park
Westminster
Concord Centre
Wheaton Park
Bradlee
Chevy Chase Metro Plaza
Montgomery Village Center
Shoppes of Foxchase2
Frederick County Square
800 S. Washington Street
Centre at Hagerstown
Frederick Crossing
Randolph Shopping Center
Montrose Shopping Center
Subtotal
28
Annual Report 2009
Form 10-k
Location
Annandale, VA
Annandale, VA
Merrifield, VA
Merrifield, VA
Merrifield, VA
Rockville, MD
Fairfax, VA
Alexandria, VA
Rockville, MD
Rockville, MD
Bel Air, MD
Rockville, MD
Washington, D.C.
Pikesville, MD
Ashburn, VA
Centreville, VA
Sterling, VA
Leesburg, VA
Takoma Park, MD
Westminster, MD
Springfield, VA
Wheaton, MD
Alexandria, VA
Washington, D.C.
Gaithersburg, MD
Alexandria, VA
Frederick, MD
Alexandria, VA
Hagerstown, MD
Frederick, MD
Rockville, MD
Rockville, MD
Year
Acquired
Year
Constructed
Net Rentable
Square Feet*
Percent Leased
12/31/09
1998
1998
2003
2003
2003
2004
2004
2006
2006
2006
2006
2006
2007
2007
2007
2007
2008
2009
1963
1972
1973
1977
1984
1985
1992
1994
1995
1998/2003
2002
2005
2006
2006
1984
1988
2000
2001
2002
1999
1965
1968
1994
1999
1991
2002
1986/2006
1996
1998/2000/2002
1998
1986/2000
2009
1962
1969
1960
1967
1955
1975
1969
1960/2006
1973
1955/1959
2000
1999/2003
1972
1970
71,000
96,000
92,000
88,000
75,000
66,000
49,000
113,000
38,000
51,000
33,000
52,000
110,000
125,000
75,000
52,000
36,000
87,000
1,309,000
51,000
151,000
76,000
72,000
168,000
49,000
198,000
134,000
227,000
44,000
332,000
295,000
82,000
143,000
2,022,000
95%
100%
100%
100%
100%
100%
70%
96%
100%
96%
100%
100%
97%
99%
86%
100%
68%
0%
89%
100%
98%
92%
96%
97%
100%
94%
95%
93%
96%
100%
98%
98%
83%
96%
Schedule of Properties (continued)
Properties
Multifamily Buildings/# of units
3801 Connecticut Avenue/308
Roosevelt Towers/191
Country Club Towers/227
Park Adams/200
Munson Hill Towers/279
The Ashby at McLean/256
Walker House Apartments/212
Bethesda Hill Apartments/195
Bennett Park/224
Clayborne/74
Kenmore/374
Subtotal/2,540
Industrial/Flex Properties
Fullerton Business Center
Charleston Business Center
The Alban Business Center
Ammendale Technology Park I
Ammendale Technology Park II
Pickett Industrial Park
Northern Virginia Industrial Park
8900 Telegraph Road
Dulles South IV
Sully Square
Amvax
Fullerton Industrial Center
8880 Gorman Road
Dulles Business Park Portfolio
Albemarle Point
Hampton Overlook
9950 Business Parkway
270 Technology Park
6100 Columbia Park Road
Subtotal
TOTAL
Location
Washington, D.C.
Falls Church, VA
Arlington, VA
Arlington, VA
Falls Church, VA
McLean, VA
Gaithersburg, MD
Bethesda, MD
Arlington, VA
Alexandria, VA
Washington, D.C.
Springfield, VA
Rockville, MD
Springfield, VA
Beltsville, MD
Beltsville, MD
Alexandria, VA
Lorton, VA
Lorton, VA
Chantilly, VA
Chantilly, VA
Beltsville, MD
Springfield, VA
Laurel, MD
Chantilly, VA
Chantilly, VA
Capitol Heights, MD
Lanham, MD
Frederick, MD
Landover, MD
Year
Acquired
Year
Constructed
Net Rentable
Square Feet*
Percent Leased
12/31/09
1963
1965
1969
1969
1970
1996
1996
1997
2007
2008
2008
1985
1993
1996
1997
1997
1997
1998
1998
1999
1999
1999
2003
2004
2004/2005
2005
2006
2006
2007
2008
1951
1964
1965
1959
1963
1982
1971/20033
1986
2007
2008
1948
1980
1973
1981/1982
1985
1986
1973
1968/1991
1985
1988
1986
1986
1980
2000
1999–2005
2001/2003/2005
1989/2005
2005
1986–1987
1969
179,000
170,000
163,000
173,000
259,000
252,000
159,000
226,000
268,000
87,000
270,000
2,206,000
104,000
85,000
87,000
167,000
107,000
246,000
787,000
32,000
83,000
95,000
31,000
137,000
141,000
324,000
207,000
302,000
102,000
157,000
150,000
3,344,000
13,057,000
92%
95%
97%
98%
98%
98%
94%
96%
98%
95%
94%
96%
42%
97%
84%
79%
70%
97%
82%
4%
90%
74%
100%
74%
100%
93%
86%
92%
100%
73%
100%
85%
The sellers of Sterling Medical office Building agreed to lease 37% of the building’s space for a period of 12–18 months following the date of sale.
1
2 Development on approximately 60,000 square feet of the center was completed in December 2006.
A 16 unit addition referred to as The Gardens at Walker House was completed in october 2003.
3
* Multifamily buildings are presented in gross square feet.
Form 10-k Washington Real Estate Investment Trust
29
Item 3. Legal Proceedings
None.
Part II
Item 4. Submission of Matters to a Vote of Security
Holders
No matters were submitted to a vote of security holders during the fourth quarter
of 2009.
Item 5. Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our shares trade on the New York Stock Exchange. Currently, there are approximately
6,484 shareholders of record.
The high and low sales price for our shares for 2009 and 2008, by quarter, and the
amount of dividends we paid per share are as follows:
Quarterly Share Price Range
Quarter
Dividends Per Share
High
2009
Fourth
Third
Second
First
2008
Fourth
Third
Second
First
$.4325
$.4325
$.4325
$.4325
$.4325
$.4325
$.4325
$.4225
$29.00
$30.02
$23.05
$27.48
$36.39
$37.61
$36.07
$34.38
Low
$25.58
$21.17
$16.91
$15.60
$20.33
$28.98
$30.05
$26.91
We have historically paid dividends on a quarterly basis. Dividends are primarily paid
from our cash flow from operating activities.
During the period covered by this report, we did not sell equity securities without
registration under the Securities Act.
Neither we nor any affiliated purchaser (as that term is defined in Securities Exchange
Act Rule 10b-18(a) (3)) made any repurchases of our shares during the fourth quarter
of the fiscal year covered by this report.
30
Annual Report 2009
Form 10-k
Item 6. Selected Financial Data
The following table sets forth our selected financial data on a historical basis, which has been revised for properties disposed of or classified as held for sale (see note 3 to the
consolidated financial statements). The following data should be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form 10-K.
(in thousands, except per share data)
Real estate rental revenue
Income from continuing operations
Discontinued operations:
Income from operations of properties sold or held for sale
Gain on sale of real estate
Net income
Net income attributable to the controlling interests
Income from continuing operations attributable to the controlling
interests per share—diluted
Net income attributable to the controlling interests per share—diluted
Total assets
Lines of credit payable
Mortgage notes payable
Notes payable
Shareholders’ equity
Cash dividends paid
Cash dividends declared and paid per share
2009
$ 306,929
$ 26,021
$
1,579
$ 13,348
$ 40,948
$ 40,745
0.45
$
$
0.71
$ 2,045,225
$ 128,000
$ 405,451
$ 688,912
$ 745,255
$ 100,221
1.73
$
1
As adjusted (see Current report on Form 8-K filed July 10, 2009 and note 3 to the consolidated financial statements).
20081
$ 278,691
7,889
$
$
4,129
$ 15,275
$ 27,293
$ 27,082
0.15
$
$
0.55
$ 2,109,407
$ 67,000
$ 421,286
$ 890,679
$ 636,630
$ 85,564
1.72
$
20071
$ 248,899
$ 25,136
$
7,510
$ 25,022
$ 57,668
$ 57,451
0.53
$
$
1.24
$ 1,897,018
$ 192,500
$ 252,484
$ 861,819
$ 502,540
$ 78,050
1.68
$
20061
$ 202,334
$ 32,477
5,780
$
$
—
$ 38,257
$ 38,053
0.73
$
$
0.87
$ 1,530,863
$ 61,000
$ 229,240
$ 719,862
$ 449,922
$ 72,681
1.64
$
20051
$ 174,092
$ 35,288
$
5,511
$ 37,011
$ 77,810
$ 77,638
0.83
$
$
1.84
$ 1,139,159
$ 24,000
$ 161,631
$ 518,600
$ 380,305
$ 67,322
1.60
$
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Conditions and Results of
Operations (“MD&A”) is provided in addition to the accompanying consolidated
financial statements and notes to assist readers in understanding our results of
operations and financial condition. MD&A is organized as follows:
• Overview. Discussion of our business, operating results, investment activity and
cash requirements, and summary of our significant transactions to provide
context for the remainder of MD&A.
• Critical Accounting Policies and Estimates. Descriptions of accounting policies
that reflect significant judgments and estimates used in the preparation of our
consolidated financial statements.
• Results of Operations. Discussion of our financial results comparing 2009 to 2008
and comparing 2008 to 2007.
• Liquidity and Capital Resources. Discussion of our financial condition and analysis
of changes in our capital structure and cash flows.
When evaluating our financial condition and operating performance, we focus on the
following financial and non-financial indicators:
• Net operating income (“NOI”), calculated as real estate rental revenue less
real estate expenses excluding depreciation and amortization and general
and administrative expenses. NOI is a non-GAAP supplemental measure to
net income.
• Funds From Operations (“FFO”), calculated as set forth below under the
caption “Funds from Operations.” FFO is a non-GAAP supplemental measure
to net income.
Form 10-k Washington Real Estate Investment Trust
31
• Economic occupancy (“occupancy”), calculated as actual real estate rental revenue
recognized for the period indicated as a percentage of gross potential real estate
rental revenue for that period. Percentage rents and expense reimbursements
are not considered in computing economic occupancy percentages.
• Leased percentage, calculated as the percentage of available physical net rentable
area leased for our commercial segments and percentage of apartments leased
for our multifamily segment.
• Rental rates.
• Leasing activity, including new leases, renewals and expirations.
Overview
Business
Our revenues are derived primarily from the ownership and operation of income-producing
properties in the greater Washington metro region. As of December 31, 2009, we owned
a diversified portfolio of 90 properties totaling approximately 10.9 million square feet
of commercial space and 2,540 multifamily units. These 90 properties consisted of 27
office properties, 20 industrial/flex properties, 18 medical office properties, 14 retail
centers, and 11 multifamily properties and land held for development.
We have a fundamental strategy of regional focus and diversification by property type.
In recent years we have sought to pursue a strategy of upgrading our portfolio by selling
lower quality properties and acquiring or developing higher quality properties. We will
seek to continue to upgrade our portfolio as opportunities arise. However, market
conditions limited our acquisition opportunities during 2009 and may continue to limit
our ability to acquire or sell properties at attractive prices in the future.
Operating Results
Real estate rental revenue, NOI, net income and FFO for 2009 and 2008 were as
follows (in thousands):
Real estate rental revenue
NOI1
Net income attributable to the controlling interests
FFO2
2009
$306,929
$202,356
$ 40,745
$121,771
2008
$278,691
$185,192
$ 27,082
$ 98,688
Change
$28,238
$17,164
$13,663
$23,083
1
2
See pages 42 and 45 of the MD&A for reconciliations of NoI to net income.
See page 56 of the MD&A for reconciliations of FFo to net income.
Our growth in NOI, net income and FFO during 2009 is due to acquisitions made
during 2008 and the lease-up of our development properties. We currently do not
expect this growth to continue in 2010, as the current market for acquisitions is
difficult and our development properties are now stabilized. NOI from our core
portfolio, consisting of properties owned for the entirety of 2009 and the same time
period in 2008, was $179.6 million for 2009 compared to $181.6 million for 2008, a
decrease of 1.1% .
We believe the national economic recession was responsible for the lower NOI from
our core portfolio. While the Washington metro region remains one of the best
performing real estate markets in the nation according to Delta Associates/Transwestern
Commercial Services (“Delta”), it still reflected the impact of the economic recession
during 2009, with declining occupancy and rental rates across all commercial segments.
The near-term outlook for recovery remains slow, as occupancy and rental rates are
currently expected to continue to decline in 2010, according to the Center for Regional
Analysis at George Mason University (“CRA”).
The performance of our five operating segments and the market conditions in our
region are discussed in greater detail below (industry data is as reported by Delta):
• The region’s office market remained weak during 2009, with overall vacancy
increasing to 13.0% from 10.6% in 2008. Vacancy in the submarkets was 14.0%
for Northern Virginia, 14.8% for Suburban Maryland, and 10.5% in the District of
Columbia. Net absorption (defined as the change in occupied, standing inventory
from one year to the next) decreased to 0.6 million square feet from 3.4 million
square feet in 2008, and the pipeline of new office properties in the region
decreased to 5.7 million square feet from 15.4 million square feet in the prior year.
Our office segment was 91.5% leased at year-end 2009, a decrease from 94.0%
leased at year-end 2008. By submarket, our office segment was 93.8% leased in
Northern Virginia, 87.0% leased in Suburban Maryland, and 95.8% leased in the
District of Columbia at year end 2009.
• Our medical office segment was 89.4% leased at year-end 2009, a decrease from
97.0% at year-end 2008. The decrease is due to the acquisition of the vacant
Lansdowne Medical Office Building during the third quarter of 2009.
• The region’s retail market declined in 2009, with vacancy rates increasing to 5.6%
from 3.7% in 2008. Rental rates at grocery-anchored centers decreased 5.8% in
2009, as compared to a 1.7% increase in 2008. Our retail segment was 96.0%
leased at year-end 2009, down from 97.8% at year-end 2008.
• The region’s multifamily market was more resilient than the commercial markets
during 2009. The region’s vacancy rate for investment grade apartments remained
the same at 4.3% , though rents did decrease by 2.0%. Our multifamily segment
was 95.8% leased at year-end 2009, up from 91.1% at year-end 2008.
• The region’s industrial market contracted during 2009. Rents decreased by
4.3% and vacancy increased to 11.4%, compared to 10.1% one year ago. Net
absorption was a negative 2.3 million square feet, compared to a positive 4.4
million square feet in 2008. Our industrial segment was 84.6% leased at year-end
2009, a decrease from 91.9% at year-end 2008.
32
Annual Report 2009
Form 10-k
Investment Activity
We sold four lower-performing properties during 2009 in order to improve the
quality of our portfolio, while executing only one property acquisition. This acquisition/
disposition level is in contrast to the prior two years, during which we acquired or
placed into service 15 properties and sold four properties. Our decrease in acquisition
activity mirrors the overall market, as property investment transactions were down
dramatically during 2009, according to Delta. For 2010, we currently expect a greater
level of acquisitions in 2010 than in 2009. However, we do not expect these potential
acquisitions to provide any significant improvement to our operating performance in
2010 due to acquisition costs.
Cash Requirements
The current economic recession has generally made it challenging to secure debt
financing. Over the past year, we have focused on strengthening our balance sheet in
order to minimize our refinancing risk and prepare for future acquisitions as transaction
volume increases. Our total debt maturities in 2010 and 2011 are $104.5 million and
$326.1 million, respectively. We currently expect to pay these maturities with some
combination of proceeds from new debt, property sales and equity issuances.
Significant Transactions
We summarize below our significant transactions during the two years ended
December 31, 2009:
2009
• The completion of a public offering of 5.25 million common shares priced at
$21.40 per share, raising $107.5 million in net proceeds.
• The disposition of one multifamily property, Avondale, for a contract sales price
of $19.8 million and a gain on sale of $6.7 million.
• The dispositions of two industrial properties, Tech 100 Industrial Park and
Crossroads Distribution Center, for contract sales prices of $10.5 million and
$4.4 million, respectively, and gains on sale of $4.1 million and $1.5 million,
respectively.
• The disposition of one office property, Brandywine Center, for a contract sales
price of $3.3 million and a gain on sale of $1.0 million.
• The acquisition of one newly constructed medical office building, Lansdowne
Medical Office Building, for $19.9 million, adding approximately 87,400 square
feet, which was 0% leased at the end of 2009.
• The execution of an agreement to modify our $100.0 million unsecured term
loan with Wells Fargo Bank, National Association to extend the maturity date
from February 19, 2010 to November 1, 2011. This agreement also increased the
interest rate on the term loan from LIBOR plus 150 basis points to LIBOR plus
275 basis points. We also entered into a forward interest rate swap on a notional
amount of $100.0 million, which had the effect of fixing the interest rate on the
loan at 4.85% for the period from February 20, 2010 through the maturity date
of November 1, 2011.
• The prepayment of our $100.0 million unsecured term loan with Wells Fargo
Bank, National Association on December 1, 2009 using borrowings from our
unsecured lines of credit. The prepayment resulted in a $1.5 million loss on
extinguishment of debt.
• The issuance of 2.0 million common shares at a weighted average price of
$27.37 under our sales agency financing agreement, raising $53.8 million in net
proceeds.
• The execution of one mortgage note of approximately $37.5 million at a fixed
rate of 5.37%, secured by the Kenmore Apartments.
• The prepayment of a $50.0 million mortgage note payable, secured by Munson
Hill Towers, Country Club Towers, Roosevelt Towers, Park Adams Apartments
and the Ashby of McLean, with no prepayment penalties.
• The repurchases of $109.7 million of our 3.875% convertible notes prices ranging
from 80% to 97.63% of par, resulting in a net gain on extinguishment of debt of
$6.8 million.
• The execution of new leases for 1.4 million square feet of commercial space, with
an average rental rate increase of 10.2% over expiring leases.
2008
• The acquisition of one office property, 2445 M Street, for $181.4 million, adding
approximately 290,000 square feet.
• The acquisition of one 374 unit apartment building, Kenmore Apartments, for
$58.3 million, adding approximately 270,000 square feet.
• The acquisition of one medical office property, Sterling Medical Office Building,
for $6.5 million, adding approximately 36,000 square feet.
• The acquisition of one industrial/flex property, 6100 Columbia Park Road, for
$11.2 million, adding approximately 150,000 square feet.
• The disposition of two industrial/flex properties, Sullyfield Center and the
Earhart Building, for a contract sales price of $41.1 million and a gain on sale of
$15.3 million.
• The agreement to acquire one medical office property, Lansdowne Medical
Office Building, for $19.5 million. The purchase occurred during 2009, as noted in
the fifth bullet under “2009” above.
• The completion of a public offering of 2,600,000 common shares priced at
$34.80 per share, raising $86.7 million in net proceeds during the second quarter
of 2008.
• The completion of a public offering of 1,725,000 common shares priced at
$35.00 per share, raising $57.6 million in net proceeds during the fourth quarter
of 2008.
Form 10-k Washington Real Estate Investment Trust
33
• The issuance of 1.1 million common shares at a weighted average price of $36.15
under our sales agency financing agreement, raising $40.7 million in net proceeds.
• The execution of three mortgage notes totaling approximately $81.0 million at a
fixed rate of 5.71% , secured by three multifamily properties.
• The repayment of the $60 million outstanding principal balance under our 6.74%
10-year Mandatory Par Put Remarketed Securities (“MOPPRS”) notes. The total
aggregate consideration paid to repurchase the notes was $70.8 million, which
amount included the $8.7 million remarketing option value paid to the remarketing
dealer and accrued interest paid to the holders. The loss on extinguishment of
debt was $8.4 million, net of unamortized loan premium costs, upon settlement
of these securities. We refinanced the repurchase of these notes, and refinanced
a portion of line outstandings, by issuing a $100 million two-year term loan. We
also entered into an interest rate swap on a notional amount of $100 million,
which had the effect of fixing the interest rate on the term loan at 4.45%.
• The repurchase of $16.0 million of our 3.875% convertible notes at a 25% discount
to par value, resulting in a gain on extinguishment of debt of $2.9 million.
• The increase in the capacity of our unsecured revolving credit facility with
a syndicate of banks led by Wells Fargo Bank, National Association from
$200 million to $262 million.
• The execution of two leases totaling 154,000 square feet at the previously
unleased Dulles Station, Phase I office building. In addition to those leases, we
executed new leases for 1.5 million square feet of commercial space elsewhere in
our portfolio, with an average rental rate increase of 19.4%.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we
evaluate these estimates, including those related to estimated useful lives of real estate
assets, estimated fair value of acquired leases, cost reimbursement income, bad debts,
contingencies and litigation. We base the estimates on historical experience and on
various other assumptions that we believe 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.
Revenue Recognition
We lease multifamily properties under operating leases with terms of generally one year
or less. We lease commercial properties (our office, medical office, retail and industrial
segments) under operating leases with average terms of three to seven years. We
recognize rental income and rental abatements from our multifamily and commercial
leases when earned on a straight-line basis over the lease term. Recognition of rental
income commences when control of the facility has been given to the tenant. We
record a provision for losses on accounts receivable equal to the estimated uncollectible
amounts. We base this estimate on our historical experience and a review of the current
status of our receivables. We recognize percentage rents, which represent additional
rents based on gross tenant sales, when tenants’ sales exceed specified thresholds.
We recognize sales of real estate at closing only when sufficient down payments have
been obtained, possession and other attributes of ownership have been transferred to
the buyer and we have no significant continuing involvement.
We recognize 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.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily represents amounts accrued and unpaid from tenants in
accordance with the terms of the respective leases, subject to our revenue recognition
policy. We review receivables monthly and establish reserves when, in the opinion of
management, collection of the receivable is doubtful. We establish reserves for tenants
whose rent payment history or financial condition casts doubt upon the tenants’
ability to perform under their lease obligations. When we deem the collection of a
receivable to be doubtful in the same quarter that we established the receivable, then
we recognize the allowance for that receivable as an offset to real estate revenues.
When we deem a receivable that was initially established in a prior quarter to be
doubtful, then we recognize the allowance as an operating expense. In addition to rents
due currently, accounts receivable include amounts representing minimal rental income
accrued on a straight-line basis to be paid by tenants over the remaining term of their
respective leases.
We include notes receivable balances of $8.5 million and $8.6 million as of
December 31, 2009 and 2008, respectively, in our accounts receivable balances.
We believe the following critical accounting policies reflect the significant judgments
and estimates used in the preparation of our consolidated financial statements. Our
significant accounting policies are also described in note 2 to the consolidated financial
statements in Item 8 of this Form 10-K.
Real Estate and Depreciation
We depreciate buildings on a straight-line basis over estimated useful lives ranging from
28 to 50 years. We capitalize all capital improvement expenditures associated with
replacements, improvements or major repairs to real property that extend its useful
34
Annual Report 2009
Form 10-k
life and depreciate them using the straight-line method over their estimated useful lives
ranging from 3 to 30 years. We also capitalize costs incurred in connection with our
development projects, including capitalizing interest and other internal costs during
periods in which qualifying expenditures have been made and activities necessary to
get the development projects ready for their intended use are in progress. In addition,
we capitalize tenant leasehold improvements when certain criteria are met, including
when we supervise construction and will own the improvements. We depreciate all
tenant improvements over the shorter of the useful life of the improvements or the
term of the related tenant lease. Real estate depreciation expense from continuing
operations for the years ended December 31, 2009, 2008 and 2007 was $75.8 million,
$68.5 million and $55.0 million, respectively. We charge maintenance and repair costs
that do not extend an asset’s life to expense as incurred.
We capitalize interest costs incurred on borrowing obligations while qualifying assets
are being readied for their intended use. Total interest expense capitalized to real
estate assets related to development and major renovation activities was $1.4 million,
$2.3 million and $6.7 million for the years ended December 31, 2009, 2008 and
2007, respectively. We amortize capitalized interest over the useful life of the related
underlying assets upon those assets being placed into service.
We recognize impairment losses on long-lived assets used in operations and held for
sale, development assets or land held for future development, if 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 and estimated undiscounted cash
flows associated with future development expenditures. If such carrying amount is in
excess of the estimated cash flows from the operation and disposal of the property,
we would recognize an impairment loss equivalent to an amount required to adjust
the carrying amount to the estimated fair value. The estimated fair value would be
calculated in accordance with current GAAP fair value provisions. There were no
property impairments recognized during the year ended December 31, 2007. During
2009 and 2008, we expensed $0.1 million and $0.6 million, respectively, included
in general and administrative expenses, related to development projects no longer
considered probable.
We record real estate acquisitions as business combinations in accordance with GAAP.
We record acquired or assumed assets, including physical assets and in-place leases,
and liabilities, based on their fair values. We record goodwill when the purchase
price exceeds the fair value of the assets and liabilities acquired. We determine the
estimated fair values of the assets and liabilities in accordance with current GAAP fair
value provisions. We determine the fair values of acquired buildings on an “as-if-vacant”
basis considering a variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated future cash flows and
valuation assumptions consistent with current market conditions. We allocate the
“as-if-vacant” fair value to land, building and tenant improvements based on property
tax assessments and other relevant information obtained in connection with the
acquisition of the property.
The fair value of in-place leases consists of the following components—(a) the
estimated cost to us to replace the leases, including foregone rents during the period
of finding a new tenant and foregone recovery of tenant pass-throughs (referred to as
“absorption cost”); (b) the estimated cost of tenant improvements, and other direct
costs associated with obtaining a new tenant (referred to as “tenant origination cost”);
(c) estimated leasing commissions associated with obtaining a new tenant (referred
to as “leasing commissions”); (d) the above/at/below market cash flow of the leases,
determined by comparing the projected cash flows of the leases in place to projected
cash flows of comparable market-rate leases (referred to as “net lease intangible”); and
(e) the value, if any, of customer relationships, determined based on our evaluation of
the specific characteristics of each tenant’s lease and our overall relationship with the
tenant (referred to as “customer relationship value”). We have attributed no value to
customer relationship value as of December 31, 2009 and 2008.
We discount the amounts used to calculate net lease intangibles using an interest rate
which reflects the risks associated with the leases acquired. We include tenant origination
costs in income producing property on our balance sheet and amortize the tenant
origination costs as depreciation expense on a straight-line basis over the remaining
life of the underlying leases. We classify leasing commissions and absorption costs as
other assets and amortize leasing commissions and absorption costs as amortization
expense on a straight-line basis over the remaining life of the underlying leases. We
classify net lease intangible assets as other assets and amortize net lease intangible assets
on a straight-line basis as a decrease to real estate rental revenue over the remaining
term of the underlying leases. We classify net lease intangible liabilities as other liabilities
and amortize net lease intangible liabilities on a straight-line basis as an increase to real
estate rental revenue over the remaining term of the underlying leases. Should a tenant
terminate its lease, we write off the unamortized portion of the tenant origination cost,
leasing commissions, absorption costs and net lease intangible associated with that lease.
Federal Income Taxes
We believe that we qualify as a real estate investment trust (“REIT”) under Sections 856-
860 of the Internal Revenue Code and intend to continue to qualify as such. To maintain
our status as a REIT, we are required to distribute 90% of our ordinary taxable income
to our shareholders. When selling properties, we have the option of (a) reinvesting the
sale price of properties sold, allowing for a deferral of income taxes on the sale, (b)
paying out capital gains to the shareholders with no tax to WRIT or (c) treating the
capital gains as having been distributed to the shareholders, paying the tax on the gain
deemed distributed and allocating the tax paid as a credit to the shareholders. In May
2009, we sold a multifamily property, Avondale, for a gain of $6.7 million. In July 2009, we
Form 10-k Washington Real Estate Investment Trust
35
sold an industrial property, Tech 100 Industrial Park, and an office property, Brandywine
Center, for gains of $4.1 million and $1.0 million, respectively. In November 2009, we
sold an industrial property, Crossroads Distribution Center, for a gain of $1.5 million. In
June 2008, we sold two industrial properties, Sullyfield Center and The Earhart Building,
for a gain of $15.3 million. The gains from the sales were paid out to the shareholders.
Generally, no provisions for income taxes are necessary except for taxes on undistributed
REIT taxable income and taxes on the income generated by our taxable REIT subsidiaries
(“TRS”). A TRS is subject to corporate federal and state income tax on its taxable
income at regular statutory rates. Certain of our taxable REIT subsidiaries have net
operating loss carryforwards available of approximately $5.3 million. These carryforwards
begin to expire in 2028. We have considered estimated future taxable income and have
determined that a full valuation allowance for our net deferred tax assets is appropriate.
There were no income tax provisions or material deferred income tax items for our TRS
for the years ended December 31, 2009, 2008 and 2007.
Results of Operations
The discussion that follows is based on our consolidated results of operations for the
years ended December 31, 2009, 2008 and 2007. The ability to compare one period to
another may be significantly affected by acquisitions completed and dispositions made
during those years.
For purposes of evaluating comparative operating performance, we categorize our
properties as “core,” “non-core” or discontinued operations. A “core” property is
one that was owned for the entirety of the periods being evaluated and is included
in continuing operations. A “non-core” property is one that was acquired or placed
into service during either of the periods being evaluated and is included in continuing
operations. Results for properties sold or held for sale during any of the periods
evaluated are classified as discontinued operations.
Properties we acquired during the years ending December 31, 2009, 2008 and 2007 are as follows:
Property
Lansdowne Medical Office Building
6100 Columbia Park Road
Sterling Medical Office Building
Kenmore Apartments (374 units)
2445 M Street
270 Technology Park
Monument II
2440 M Street
Woodholme Medical Office Building
Woodholme Center
Ashburn Farm Office Park
CentreMed I & II
4661 Kenmore Avenue
2000 M Street
Type
Medical Office
Industrial/Flex
Medical Office
Multifamily
Office
Industrial/Flex
Office
Medical Office
Medical Office
Office
Medical Office
Medical Office
Land for Development
Office
Rentable
Square Feet
87,000
87,000
150,000
36,000
270,000
290,000
746,000
157,000
205,000
110,000
125,000
73,000
75,000
52,000
n/a
227,000
1,024,000
Contract
Purchase Price
(in thousands)
$ 19,900
$ 19,900
$ 11,200
6,500
58,300
181,400
$257,400
$ 26,500
78,200
50,000
30,800
18,200
23,000
15,300
3,750
73,500
$319,250
Acquisition Date
August 13, 2009
Total 2009
February 22, 2008
May 21, 2008
September 3, 2008
December 2, 2008
Total 2008
February 8, 2007
March 1, 2007
March 9, 2007
June 1, 2007
June 1, 2007
June 1, 2007
August 16, 2007
August 30, 2007
December 4, 2007
Total 2007
36
Annual Report 2009
Form 10-k
Properties we sold or classified as held for sale during the three years ending December 31, 2009 are as follows:
Disposition Date
May 13, 2009
July 23, 2009
July 31, 2009
November 13, 2009
Total 2009
June 6, 2008
Total 2008
September 26, 2007
Total 2007
Property
Avondale
Tech 100 Industrial Park
Brandywine Center
Crossroads Distribution Center
Charleston Business Center
Type
Multifamily
Industrial
Office
Industrial
Industrial
Sullyfield Center/The Earhart Building
Industrial
Maryland Trade Center I & II
Office
Rentable
Square Feet
170,000
166,000
35,000
85,000
85,000
541,000
336,000
336,000
342,000
342,000
Contract
Sales Price
(in thousands)
$19,800
10,500
3,300
4,400
Held for sale
$38,000
$41,100
$41,100
$58,000
$58,000
We placed into service two development properties, Clayborne Apartments and
Dulles Station, Phase I, in 2008, and one development property, Bennett Park, at the
end of 2007.
To provide more insight into our operating results, we divide our discussion into two
main sections: (a) the consolidated results of operations section, in which we provide
an overview analysis of results on a consolidated basis, and (b) the net operating
income (“NOI”) section, in which we provide a detailed analysis of core versus non-
core NOI results by segment. NOI is a non-GAAP measure calculated as real estate
rental revenue less real estate expenses excluding depreciation and amortization and
general and administrative expenses.
Consolidated Results of Operations
Real Estate Rental Revenue
Real estate rental revenue for properties classified as continuing operations is summarized as follows (all data in thousands except percentage amounts):
Minimum base rent
Recoveries from tenants
Provisions for doubtful accounts
Lease termination fees
Parking and other tenant charges
2009
$265,433
36,555
(6,232)
1,471
9,702
$306,929
2008
$242,477
30,874
(4,451)
1,101
8,690
$278,691
2007
$217,730
24,924
(1,931)
505
7,671
$248,899
2009 vs
2008
$22,956
5,681
(1,781)
370
1,012
$28,238
%
Change
9.5%
18.4%
(40.0%)
33.6%
11.6%
10.1%
2008 vs
2007
$24,747
5,950
(2,520)
596
1,019
$29,792
%
Change
11.4%
23.9%
(130.5%)
118.0%
13.3%
12.0%
Form 10-k Washington Real Estate Investment Trust
37
Real estate rental revenue is comprised of (a) minimum base rent, which includes
rental revenues recognized on a straight-line basis, (b) revenue from the recovery
of operating expenses from our tenants, (c) provisions for doubtful accounts,
which includes provisions for straight-line receivables, (d) revenue from the
collection of lease termination fees and (e) parking and other tenant charges such as
percentage rents.
Minimum Base Rent: Minimum base rent increased by $23.0 million in 2009 as compared
to 2008 due primarily to properties acquired or placed into service in 2009 and 2008
($21.0 million), combined with a $2.0 million increase in minimum base rent from core
properties due to higher rental rates, partially offset by higher vacancy.
Minimum base rent increased by $24.7 million in 2008 as compared to 2007 due
primarily to properties acquired or placed into service in 2008 and 2007 ($22.5 million),
combined with a $2.2 million increase in minimum base rent from core properties
due to higher rental rates in all segments, partially offset by higher vacancy in the
commercial segments.
Recoveries from Tenants: Recoveries from tenants increased by $5.7 million in 2009
as compared to 2008 due primarily to properties acquired or placed into service in
2009 and 2008 ($5.5 million), combined with a $0.2 million increase in recoveries
from tenants from core properties primarily due to higher utilities reimbursements
($0.7 million) and real estate tax reimbursements ($0.3 million), offset by lower
common area maintenance reimbursements ($0.9 million) due to lower occupancy
in the retail and industrial segments.
Recoveries from tenants increased by $6.0 million in 2008 as compared to 2007 due
primarily to properties acquired or placed into service in 2008 and 2007 ($4.0 million),
combined with a $2.0 million increase in recoveries from tenants from core properties
primarily due to higher real estate tax reimbursements ($1.6 million) and common area
maintenance reimbursements ($0.3 million).
Provisions for Doubtful Accounts: Provisions for doubtful accounts increased by $1.8 million
in 2009 as compared to 2008 due to higher provisions in the office ($1.3 million) and
retail ($0.7 million) segments, offset by lower provisions in the medical office segment
($0.3 million). The higher overall provision is reflective of the economic recession that
began in 2008.
Provisions for doubtful accounts increased by $2.5 million in 2008 as compared to
2007 due to higher provisions in the retail ($1.0 million), industrial ($0.9 million) and
office ($0.5 million) segments. Provisions for bad debt in the multifamily and medical
office segments did not materially change. The higher overall provision is reflective of
the economic recession that began in 2008.
Lease Termination Fees: Lease termination fees increased by $0.4 million in 2009
as compared to 2008 due primarily to higher fees in the retail ($0.3 million) and
industrial ($0.4 million) segments, partially offset by lower fees in the office segment
($0.4 million).
Lease termination fees increased by $0.6 million in 2008 as compared to 2007 due
primarily to higher fees in the office segment ($0.8 million), partially offset by lower fees
in the retail segment ($0.2 million).
Parking and Other Tenant Charges: Parking and other tenant charges increased by
$1.0 million in 2009 as compared to 2008 due primarily to properties acquired or
placed into service in 2009 and 2008 ($0.8 million), combined with a $0.2 million
increase in parking and other tenant charges from core properties primarily due to
higher parking fees ($0.1 million) in the office segment.
Parking and other tenant charges increased by $1.0 million in 2008 as compared to
2007 due primarily to higher parking revenue and miscellaneous fees in the multifamily
($0.3 million), office ($0.4 million) and medical office ($0.2 million) segments.
A summary of economic occupancy for properties classified as continuing operations
by segment follows:
Consolidated Economic Occupancy
Segment
Office
Medical Office
Retail
Multifamily
Industrial
Total
2009
92.6%
95.2%
94.6%
91.5%
89.6%
92.7%
2008
93.2%
96.5%
94.9%
83.0%
93.8%
92.3%
2007
94.6%
98.3%
95.2%
89.2%
95.2%
94.5%
2009 vs
2008
(0.6%)
(1.3%)
(0.3%)
8.5%
(4.2%)
0.4%
2008 vs
2007
(1.4%)
(1.8%)
(0.3%)
(6.2%)
(1.4%)
(2.2%)
Economic occupancy represents actual real estate rental revenue recognized for the
period indicated as a percentage of gross potential real estate rental revenue for that
period. Percentage rents and expense reimbursements are not considered in computing
economic occupancy percentages.
Our overall economic occupancy increased to 92.7% in 2009 from 92.3% in 2008, due
to the lease-up of our development properties in the office and multifamily segments.
Our development properties Bennett Park, Clayborne Apartments and Dulles Station,
Phase I were placed into service at the end of 2007 and during 2008, and were 98% ,
95% and 91% leased at the end of 2009, respectively. The gains at these development
properties were offset by lower occupancy across the rest of the portfolio, particularly
in the industrial segment.
38
Annual Report 2009
Form 10-k
Our overall economic occupancy decreased to 92.3% in 2008 from 94.5% in 2007,
driven primarily by the lease-up during 2008 of our development properties in
the office and multifamily segments. Our development properties Bennett Park,
Clayborne Apartments and Dulles Station, Phase I were placed into service at the
end of 2007 and during 2008, and were 78% , 64% and 86% leased at the end of
2008, respectively.
A detailed discussion of occupancy by sector can be found in the Net Operating
Income section.
Real Estate Expenses
Real estate expenses are summarized as follows (all data in thousands except percentage amounts):
Property operating expenses
Real estate taxes
2009
$ 71,839
32,734
$104,573
2008
$65,549
27,950
$93,499
2007
$55,668
21,691
$77,359
2009 vs
2008
$ 6,290
4,784
$11,074
%
Change
9.6%
17.1%
11.8%
2008 vs
2007
$ 9,881
6,259
$16,140
%
Change
17.7%
28.9%
20.9%
Real estate expenses as a percentage of revenue were 34.1% for 2009, 33.5% for 2008
and 31.1% for 2007.
Property Operating Expenses: Property operating expenses include utilities, repairs and
maintenance, property administration and management, operating services, common
area maintenance, property insurance, bad debt and other operating expenses.
Property operating expenses increased $6.3 million in 2009 as compared to 2008
due primarily to properties acquired and placed into service in 2009 and 2008, which
accounted for $4.8 million of the increase. Property operating expenses from core
properties increased by $1.5 million, driven by higher electricity costs ($0.6 million)
due to increased rates and higher snow removal costs ($1.3 million, not including any
tenant reimbursements) due to a severe snow storm in December 2009.
Property operating expenses increased $9.9 million in 2008 as compared to 2007
due primarily to properties acquired and placed into service in 2008 and 2007, which
accounted for $9.0 million of the increase. Property operating expenses from core
properties increased by $0.9 million, driven by higher repairs and maintenance costs
($0.5 million) and administrative costs ($0.5 million).
Real Estate Taxes: Real estate taxes increased $4.8 million in 2009 as compared to 2008
due primarily to the properties acquired or placed into service in 2009 and 2008, which
accounted for $3.4 million of the increase. Real estate taxes on core properties increased
by $1.4 million due primarily to higher rates and assessments across the portfolio.
Real estate taxes increased $6.3 million in 2008 as compared to 2007 due primarily
to the properties acquired or placed into service in 2008 and 2007, which accounted
for $4.1 million of the increase. Real estate taxes on core properties increased by
$2.2 million due primarily to higher rates and assessments across the portfolio.
Other Operating Expenses
Other operating expenses are summarized as follows (all data in thousands except percentage amounts):
Depreciation and amortization
Interest expense
General and administrative
2009
$ 94,042
75,001
13,906
$182,949
2008
$ 85,659
75,041
12,110
$172,810
2007
$ 68,364
66,336
14,882
$149,582
2009 vs
2008
$ 8,383
(40)
1,796
$10,139
%
Change
9.8%
(0.1%)
14.8%
5.9%
2008 vs
2007
$17,295
8,705
(2,772)
$23,228
%
Change
25.3%
13.1%
(18.6%)
15.5%
Form 10-k Washington Real Estate Investment Trust
39
Depreciation and Amortization: Depreciation and amortization expense increased by
$8.4 million in 2009 as compared to 2008 due primarily to properties acquired and
placed into service of $19.9 million and $340.3 million in 2009 and 2008, respectively.
Depreciation and amortization expense increased by $17.3 million in 2008 as compared
to 2007 due primarily to properties acquired and placed into service of $340.3 million
and $411.4 million in 2008 and 2007, respectively.
Interest Expense: A summary of interest expense for the years ended December 31, 2009, 2008 and 2007 appears below (in millions, except percentage amounts):
Debt Type
Notes payable
Mortgages
Lines of credit/short-term note payable
Capitalized interest
Total
2009
$48.2
26.7
1.5
(1.4)
$75.0
2008
$53.2
18.4
5.7
(2.3)
$75.0
2007
$52.2
14.5
6.3
(6.7)
$66.3
2009 vs
2008
$(5.0)
8.3
(4.2)
0.9
$ —
%
Change
(9.4%)
45.1%
(73.7%)
39.1%
—%
2008 vs
2007
$ 1.0
3.9
(0.6)
4.4
$ 8.7
%
Change
1.9%
26.9%
(9.5%)
65.7%
13.1%
Interest expense was flat in 2009 compared to 2008. An $8.3 million increase in
mortgage interest due to entering into three new mortgage notes during the second
quarter of 2008 and assuming the 2445 M Street mortgage in the fourth quarter
of 2008 was offset by lower notes payable interest due to early paydowns of notes.
Also, interest on our unsecured lines of credit decreased by $4.2 million due to lower
balances outstanding and lower interest rates. The proceeds of the 2008 mortgage
notes were used to pay down our unsecured lines of credit.
Interest expense increased $8.7 million in 2008 compared to 2007, reflecting a
$4.4 million decrease in capitalized interest due to placing development projects into
service at the end of 2007 and during 2008. Also, mortgage interest increased by
$3.9 million due to entering into three new mortgage notes during the second quarter
of 2008, as well as assuming a mortgage as part of the 2445 M Street acquisition in the
fourth quarter of 2008. The proceeds of the new mortgage notes were used to pay
down our unsecured lines of credit.
General and Administrative Expense: General and administrative expense increased by
$1.8 million in 2009 as compared to 2008 due primarily to higher incentive compensation
expense ($2.1 million) and the expensing of pre-acquisition costs ($0.8 million) related
to the purchase of Lansdowne Medical Office Building in 2009. Pre-acquisition costs
were capitalized prior to the January 1, 2009 adoption of current GAAP provisions
regarding business combinations (see note 2 to the consolidated financial statements).
These were partially offset by an increase in the cash surrender value of officer life
insurance policies ($0.6 million).
General and administrative expense decreased by $2.8 million in 2008 as compared to
2007 due primarily to lower incentive compensation expense ($3.1 million). This was
partially offset by a decrease in the cash surrender value of officer life insurance policies
($0.3 million).
Discontinued Operations
We dispose of assets (sometimes using tax-deferred exchanges) that no longer meet
our long-term strategy or return objectives and where market conditions for sale are
favorable. The proceeds from the sales may be reinvested into other properties, used
to fund development operations or to support other corporate needs, or distributed
to our shareholders.
We sold four properties in 2009. We sold Avondale, a multifamily property, on May 13,
2009 for a contract sales price of $19.8 million that resulted in a gain on sale of
$6.7 million. We sold Tech 100 Industrial Park, an industrial property, on July 23, 2009
for a contract sales price of $10.5 million that resulted in a gain on sale of $4.1 million.
We sold Brandywine Center, an office property, on July 31, 2009 for a contract sales
price of $3.3 million that resulted in a gain on sale of $1.0 million. We sold Crossroads
Distribution Center, an industrial property, on November 13, 2009 for a contract sales
price of $4.4 million that resulted in a gain on sale of $1.5 million.
Charleston Business Center, an industrial property, met the criteria necessary for
classification as held for sale as of March 31, 2009. Senior management has committed
40
Annual Report 2009
Form 10-k
to, and actively embarked upon, a plan to sell this asset and the sale is expected to
be completed within one year under terms usual and customary for such sales, with
no indications that the plan will be significantly altered or abandoned. Depreciation
on this property has been discontinued as of the date it was classified as held for sale,
but operating revenues and expenses continue to be recognized until the date of sale.
Under GAAP, revenues and expenses of properties that are classified as held for sale
are treated as discontinued operations for all periods presented in the consolidated
statements of income.
We sold Sullyfield Center and The Earhart Building, two industrial properties, on June 6, 2008
for a contract sales price of $41.1 million that resulted in a gain on sale of $15.3 million.
We sold Maryland Trade Centers I and II, two office properties, on September 26, 2007 for
a contract sales price of $58.0 million that resulted in gain on sale of $25.0 million. We used
$15.3 million of the proceeds from the sale to fund the purchase of CentreMed I & II on
August 16, 2007 in a reverse tax free property exchange. We escrowed $40.1 million of the
proceeds from the sale in a tax free property exchange account, and subsequently used these
proceeds to fund a portion of the purchase price of 2000 M Street on December 4, 2007.
Operating results of the properties classified as discontinued operations are summarized as follows (in thousands, except for percentages):
Revenues
Property expenses
Depreciation and amortization
Total
2009
$ 3,346
(1,362)
(405)
$ 1,579
2008
$ 8,496
(3,128)
(1,239)
$ 4,129
2007
$16,111
(5,948)
(2,653)
$ 7,510
2009 vs
2008
$(5,150)
1,766
834
$(2,550)
%
Change
(60.6%)
56.5%
67.3%
(61.8%)
2008 vs
2007
$(7,615)
2,820
1,414
$(3,381)
%
Change
(47.3%)
47.4%
53.3%
(45.0%)
Income from operations of properties sold or held for sale decreased to $1.6 million in
2009 from $4.1 million in 2008 due to the sales of Sullyfield Center and The Earhart
Building in 2008 and the sales of Avondale, Tech 100 Industrial Park, Brandywine
Center and Crossroads Distribution Center in 2009.
Income from operations of properties sold or held for sale decreased to $4.1 million in
2008 from $7.5 million in 2007 due to the sale of Maryland Trade Center I & II in 2007
and the sales of Sullyfield Center and The Earhart Building in 2008.
Net Operating Income
NOI is the primary performance measure we use to assess the results of our
operations at the property level. We believe that NOI is useful as a performance
measure because, when compared across periods, NOI reflects the impact on
operations of trends in occupancy rates, rental rates and operating costs on an
unleveraged basis, providing perspective not immediately apparent from net income.
NOI excludes certain components from net income in order to provide results more
closely related to a property’s results of operations. For example, interest expense
is not necessarily linked to the operating performance of a real estate asset. In
addition, depreciation and amortization, because of historical cost accounting and
useful life estimates, may distort operating performance at the property level. As a
result of the foregoing, we provide NOI as a supplement to net income calculated
in accordance with GAAP. NOI does not represent net income calculated in
accordance with GAAP. As such, it should not be considered an alternative to
net income as an indication of our operating performance. NOI is calculated as
real estate rental revenue less real estate expenses excluding depreciation and
amortization and general and administrative expenses. A reconciliation of NOI to
net income follows.
Form 10-k Washington Real Estate Investment Trust
41
Real estate rental revenue increased by $28.2 million in 2009 as compared to 2008
due primarily to the acquisition or placing into service of two office properties, one
medical office property, three multifamily properties and one industrial property in
2009 and 2008, which added approximately 1.3 million square feet of net rentable
space. These acquisition and development properties contributed $27.4 million
of the increase. Real estate rental revenue from the core properties increased by
$0.9 million primarily due to higher rental rates ($6.0 million) in all segments and
higher lease termination fees ($0.4 million) in the retail and industrial segments,
partially offset by lower core occupancy ($4.0 million) and higher bad debt expense
($1.8 million) in the commercial segments.
Real estate expenses increased by $11.1 million in 2009 as compared to 2008 due
primarily to acquisition and development properties, which contributed $8.2 million
of the increase. Real estate expenses from core properties increased by $2.8 million
due primarily to higher real estate taxes ($1.4 million) caused by increased rates and
assessments across the portfolio, higher snow removal costs ($1.3 million, not including
any tenant reimbursements) caused by a severe snow storm in December 2009 and
higher electricity costs ($0.6 million) caused by increased rates, partially offset by lower
administrative expenses ($0.4 million).
Core economic occupancy decreased to 93.0% in 2009 from 94.4% in 2008, with the
most severe decreases in the industrial and office segments. We believe this weakness
in core occupancy is reflective of the national economic recession. Non-core economic
occupancy increased to 90.6% in 2009 from 57.9% in 2008, driven by the completion of
lease-up for our development properties in the office and multifamily segments. During
2009, 67.4% of the commercial square footage expiring was renewed as compared to
62.1% in 2008, excluding properties sold or classified as held for sale. During 2009,
1.4 million commercial square feet were leased at an average rental rate of $24.92 per
square foot, an increase of 10.2%, with average tenant improvements and leasing costs
of $13.95 per square foot. These leasing statistics exclude first generation leases at
development properties.
2009 Compared to 2008
The following tables of selected operating data provide the basis for our discussion of NOI
in 2009 compared to 2008. All amounts are in thousands except percentage amounts.
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Reconciliation to Net Income
NOI
Other income
Income from non-disposal activities
Interest expense
Depreciation and amortization
General and administrative expenses
Gain (loss) on extinguishment of debt
Discontinued operations2
Gain on sale of real estate
Net income
Less: Net income attributable to
noncontrolling interests
Net income attributable to the
controlling interests
Economic Occupancy
Core
Non-core1
Total
Years Ended December 31,
2009
2008
$ Change % Change
$269,655
37,274
$306,929
$268,781
9,910
$278,691
$ 90,047
14,526
$104,573
$ 87,215
6,284
$ 93,499
$
874
27,364
$28,238
$ 2,832
8,242
$11,074
0.3%
276.1%
10.1%
3.2%
131.2%
11.8%
$179,608
22,748
$202,356
$181,566
3,626
$185,192
$ (1,958)
19,122
$17,164
(1.1%)
527.4%
9.3%
$202,356
1,205
73
(75,001)
(94,042)
(13,906)
5,336
1,579
13,348
40,948
$185,192
1,073
17
(75,041)
(85,659)
(12,110)
(5,583)
4,129
15,275
27,293
(203)
(211)
$ 40,745
$ 27,082
2009
93.0%
90.6%
92.7%
2008
94.4%
57.9%
92.3%
1 Non-core properties include: Multifamily development properties—Clayborne Apartments and Bennett Park; office
development property—Dulles Station, Phase I; 2009 acquisition—Lansdowne Medical office Building; 2008
acquisitions—6100 Columbia Park road, Sterling Medical office Building, Kenmore Apartments and 2445 M Street
2 Discontinued operations include gain on disposals and income from operations for: 2009 dispositions—Avondale,
Tech 100 Industrial Park, Brandywine Center and Crossroads Distribution Center; 2008 disposals—Sullyfield Center
and The Earhart Building; 2009 held for sale—Charleston
42
Annual Report 2009
Form 10-k
An analysis of NOI by segment follows.
Office Segment:
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Economic Occupancy
Core
Non-core1
Total
Years Ended December 31,
2009
2008
$ Change % Change
$114,944
21,513
$136,457
$115,685
2,608
$118,293
$ (741)
18,905
$18,164
$ 41,462
7,436
$ 48,898
$ 40,956
1,471
$ 42,427
$ 506
5,965
$ 6,471
(0.6%)
724.9%
15.4%
1.2%
405.5%
15.3%
$ 73,482
14,077
$ 87,559
$ 74,729
1,137
$ 75,866
$ (1,247)
12,940
$11,693
(1.7%)
1,138.1%
15.4%
2009
92.2%
95.6%
92.6%
2008
93.9%
73.2%
93.2%
1 Non-core properties include: Development property—Dulles Station, Phase I; 2008 acquisition—2445 M Street
Real estate rental revenue in the office segment increased by $18.2 million in 2009 as
compared to 2008 due to acquisition and development properties, which contributed
all of the increase. Real estate rental revenue from core properties decreased by
$0.7 million primarily due to lower core occupancy ($2.1 million), lower recovery
income ($0.8 million), higher bad debt ($1.3 million) and lower lease termination fees
($0.4 million), partially offset by higher rental rates ($3.6 million).
Real estate expenses in the office segment increased by $6.5 million in 2009 as
compared to 2008 due primarily to acquisition and development properties, which
contributed $6.0 million of the increase. Real estate expenses from core properties
increased by $0.5 million primarily due to higher electricity costs ($0.3 million) caused
by higher rates, higher snow removal costs ($0.2 million, not including any tenant
reimbursements) caused by a severe snow storm in December 2009, and higher real
estate taxes ($0.2 million) caused by higher rates and assessments. These were offset
by lower property management payroll expense ($0.2 million) due to the elimination
of several positions.
Core economic occupancy decreased to 92.2% in 2009 from 93.9% in 2008, driven
by higher vacancy at One Central Plaza, 6565 Arlington Boulevard and 1220 19th
Street. These were partially offset by higher economic occupancy at The Crescent and
600 Jefferson Plaza. Non-core economic occupancy increased to 95.6% from 73.2%
due to the lease-up of Dulles Station, Phase I, a development property. During 2009,
59.8% of the square footage that expired was renewed compared to 41.9% in 2008,
excluding properties sold or classified as held for sale. During 2009, we executed new
leases for 683,800 square feet of office space at an average rental rate of $31.14 per
square foot, an increase of 11.6% , with average tenant improvements and leasing costs
of $20.14 per square foot. These leasing statistics exclude first generation leases at the
development property, Dulles Station, Phase I.
Medical Office Segment:
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Economic Occupancy
Core
Non-core1
Total
Years Ended December 31,
2009
2008
$ Change % Change
$44,251
660
$44,911
$14,674
544
$15,218
$29,577
116
$29,693
$43,210
384
$43,594
$13,924
253
$14,177
$29,286
131
$29,417
$1,041
276
$1,317
$ 750
291
$1,041
$ 291
(15)
$ 276
2009
96.6%
50.4%
95.2%
2.4%
71.9%
3.0%
5.4%
115.0%
7.3%
1.0%
(11.5%)
0.9%
2008
97.0%
61.1%
96.5%
1 Non-core properties include: 2009 acquisition—Lansdowne Medical office Building; 2008 acquisition—Sterling
Medical office Building
Real estate rental revenue in the medical office segment increased by $1.3 million
in 2009 as compared to 2008 due primarily to higher rental rates ($1.1 million) and
lower bad debt ($0.3 million) on the core properties, offset by higher core vacancy
($0.2 million). The 2008 acquisition of Sterling Medical Office Building contributed
$0.3 million to the increase.
Real estate expenses in the medical office segment increased by $1.0 million in 2009
as compared to 2008 due primarily to higher real estate taxes ($0.3 million) caused
by higher rates and assessments on the core portfolio, an increase to our reserve for
straight-line receivables ($0.2 million) and higher snow removal costs ($0.2 million,
Form 10-k Washington Real Estate Investment Trust
43
not including any tenant reimbursements). The acquisition properties contributed
$0.3 million to the increase.
Multifamily Segment:
Core economic occupancy decreased to 96.6% in 2009 from 97.0% in 2008, driven
by higher vacancy at Woodburn I and 8301 Arlington Boulevard. Non-core economic
occupancy decreased to 50.4% from 61.1% due to the acquisition of the vacant
Lansdowne Medical Office Building during the third quarter of 2009. This building
remains unleased as of the end of 2009. During 2009, 64.4% of the square footage
that expired was renewed compared to 63.6% in 2008. During 2009, we executed
new leases for 139,600 square feet of medical office space at an average rental rate of
$36.80, an increase of 15.9%, with average tenant improvements and leasing costs of
$24.28 per square foot.
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Years Ended December 31,
2009
2008
$ Change % Change
Total NOI
$41,821
$40,987
$ 834
2.0%
$10,680
$ 9,647
$1,033
10.7%
Economic Occupancy
Core
Non-core1
Total
Retail Segment:
Real Estate Rental Revenue
Total
Real Estate Expenses
Total
NOI
Total
Economic Occupancy
Total
Years Ended December 31,
2009
2008
$ Change % Change
$32,909
13,561
$46,470
$13,382
6,112
$19,494
$19,527
7,449
$26,976
$32,199
5,659
$37,858
$13,315
4,121
$17,436
$18,884
1,538
$20,422
$ 710
7,902
$8,612
$
67
1,991
$2,058
$ 643
5,911
$6,554
2009
93.3%
87.3%
91.5%
2.2%
139.6%
22.7%
0.5%
48.3%
11.8%
3.4%
384.3%
32.1%
2008
93.5%
49.6%
83.0%
$31,141
$31,340
$ (199)
(0.6%)
1 Non-core properties include: Development properties—Clayborne Apartments and Bennett Park; 2008 acquisition—
Kenmore Apartments
2009
94.6%
2008
94.9%
Real estate rental revenue in the retail segment increased by $0.8 million in 2009 as
compared to 2008 due to higher rental rates ($0.9 million), higher lease termination
fees ($0.3 million) and higher real estate tax reimbursements ($0.3 million), offset by
higher bad debt ($0.7 million).
Real estate expenses in the retail segment increased by $1.0 million in 2009 as
compared to 2008 due to higher legal fees ($0.5 million) related to litigation concerning
the remediation of an environmental condition at Westminster Shopping Center and
higher real estate taxes ($0.4 million) caused by higher rates and assessments.
Economic occupancy decreased to 94.6% in 2009 from 94.9% in 2008, driven by higher
vacancy at the Centre at Hagerstown and Montrose Shopping Center. These were
partially offset by lower vacancy at Foxchase Shopping Center and South Washington
Street. During 2009, 52.2% of the square footage that expired was renewed compared
to 91.5% in 2008. During 2009, we executed new leases for 145,900 square feet of
retail space at an average rental rate of $17.60, a decrease of 0.4% , with average tenant
improvements and leasing costs of $9.08 per square foot.
44
Annual Report 2009
Form 10-k
Real estate rental revenue in the multifamily segment increased by $8.6 million in
2009 as compared to 2008 due primarily to acquisition and development properties,
which contributed $7.9 million of the increase. Real estate rental revenue from
core properties increased by $0.7 million due primarily to lower rent abatements
($0.3 million) and higher utilities reimbursements ($0.3 million).
Real estate expenses in the multifamily segment increased by $2.1 million in 2009 as
compared to 2008 due primarily to acquisition and development properties, which
contributed $2.0 million of the increase. Real estate expenses from core properties
increased by $0.1 million primarily due to higher snow removal costs, not including any
tenant reimbursements, due to a severe snow storm in December 2009.
Core economic occupancy decreased to 93.3% in 2009 from 93.5% in 2008, driven
by lower occupancy at Munson Hill Towers and Walker House. Non-core economic
occupancy increased to 87.3% from 49.6%, reflecting the lease-up of Bennett Park and
Clayborne Apartments.
Years Ended December 31,
2009
2008
$ Change % Change
2008 Compared to 2007
The following tables of selected operating data provide the basis for our discussion of NOI
in 2008 compared to 2007. All amounts are in thousands except percentage amounts.
Industrial Segment:
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Economic Occupancy
Core
Non-core1
Total
$35,730
1,540
$37,270
$ 9,849
434
$10,283
$25,881
1,106
$26,987
$36,700
1,259
$37,959
$ 9,373
439
$ 9,812
$27,327
820
$28,147
$ (970)
281
$ (689)
$ 476
(5)
$ 471
$(1,446)
286
$(1,160)
2009
89.2%
100.0%
89.6%
(2.6%)
22.3%
(1.8%)
5.1%
(1.1%)
4.8%
(5.3%)
34.9%
(4.1%)
2008
93.8%
94.2%
93.8%
1 Non-core properties include: 2008 acquisition—6100 Columbia Park road
Real estate rental revenue in the industrial segment decreased by $0.7 million in 2009
as compared to 2008 due primarily to lower core occupancy ($1.5 million) and higher
bad debt ($0.1 million), offset by higher lease termination fees ($0.4 million) and higher
expense recoveries ($0.2 million). The 2008 acquisition of 6100 Columbia Park Road
contributed $0.3 million of additional real estate revenue.
Real estate expenses in the industrial segment increased by $0.5 million in 2009 as
compared to 2008 due primarily to higher snow removal costs ($0.5 million, not
including any tenant reimbursements) caused by a severe snow storm in December
2009 and higher real estate taxes ($0.3 million) caused by higher rates and assessments.
These were offset by higher recoveries of previously reserved bad debt ($0.2 million).
Core economic occupancy decreased to 89.2% in 2009 from 93.8% in 2008, driven by
higher vacancy at 270 Tech Park, Ammendale Technology Park and NVIP I & II. Non-
core economic occupancy increased to 100.0% from 94.2% , reflecting full occupancy
at 6100 Columbia Park Road. During 2009, 81.0% of the square footage that expired
was renewed compared to 62.0% in 2008, excluding properties sold or classified as
held for sale. During 2009, we executed new leases for 453,400 square feet of industrial
space at an average rental rate of $8.80, an increase of 3.2%, with average tenant
improvements and leasing costs of $3.01 per square foot.
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Reconciliation to Net Income
NOI
Other income
Income from non-disposal activities
Interest expense
Depreciation and amortization
General and administrative expenses
Loss on extinguishment of debt
Discontinued operations2
Gain on sale of real estate
Net income
Less: Net income attributable to
noncontrolling interests
Net income attributable to the
controlling interests
Economic Occupancy
Core
Non-core1
Total
Years Ended December 31,
2008
2007
$ Change % Change
$231,652
47,039
$278,691
$229,565
19,334
$248,899
$ 73,600
19,899
$ 93,499
$ 70,546
6,813
$ 77,359
$ 2,087
27,705
$29,792
$ 3,054
13,086
$16,140
0.9%
143.3%
12.0%
4.3%
192.1%
20.9%
$158,052
27,140
$185,192
$159,019
12,521
$171,540
$ (967)
14,619
$13,652
(0.6%)
116.8%
8.0%
$185,192
1,073
17
(75,041)
(85,659)
(12,110)
(5,583)
4,129
15,275
27,293
$171,540
1,875
1,303
(66,336)
(68,364)
(14,882)
—
7,510
25,022
57,668
(211)
(217)
$ 27,082
$ 57,451
2008
94.5%
82.2%
92.3%
2007
94.7%
92.6%
94.5%
1 Non-core properties include: Multifamily development properties—Clayborne Apartments and Bennett Park; office
development property—Dulles Station, Phase I; 2008 office acquisition—2445 M Street; 2008 medical office
acquisition—Sterling Medical office Building; 2008 multifamily acquisition—Kenmore Apartments; 2008 industrial
acquisition—6100 Columbia Park road; 2007 office acquisitions—Monument II, Woodholme Center and 2000 M
Street; 2007 medical office acquisitions—2440 M Street, Woodholme Medical office Building, Ashburn Farm office
Park and CentreMed I & II; 2007 industrial acquisition—270 Technology Park
Form 10-k Washington Real Estate Investment Trust
45
2 Discontinued operations include gain on disposals and income from operations for: Held for sale—Charleston Business
Center; 2009 dispositions—Avondale, Tech 100 Industrial Park, Brandywine Center and Crossroads Distribution
Center; 2008 disposals—Sullyfield Center and The Earhart Building; 2007 disposals—Maryland Trade Center I and II
An analysis of NOI by segment follows.
Office Segment:
Real estate rental revenue increased by $29.8 million in 2008 as compared to 2007
due primarily to the acquisition or placing into service of five office properties, five
medical office properties, three multifamily properties and two industrial properties
in 2007 and 2008, which added approximately 2.3 million square feet of net rentable
space. These acquisition and development properties contributed $27.7 million of the
increase. Real estate rental revenue from the core properties increased by $2.1 million
primarily due to higher rental rates in all segments ($2.9 million) and higher expense
recoveries ($2.0 million), partially offset by higher provisions for bad debt ($2.4 million)
and lower core occupancy ($0.6 million) in the commercial segments.
Real estate expenses increased by $16.1 million in 2008 as compared to 2007 due
primarily to acquisition and development properties, which contributed $13.1 million
of the increase. Real estate expenses from core properties increased by $3.1 million
due primarily to higher real estate taxes ($2.2 million), administrative expenses
($0.5 million) and repairs and maintenance ($0.5 million).
Core economic occupancy decreased to 94.5% in 2008 from 94.7% in 2007 due to
lower core economic occupancy in the commercial property segments, partially offset
by higher core economic occupancy in the multifamily segment. Non-core economic
occupancy decreased to 82.2% in 2008 from 92.6% in 2007, driven by the lease-up of
our development properties in the office and multifamily segments. During 2008, 62.1%
of the commercial square footage expiring was renewed as compared to 79.6% in 2007.
During 2008, 1.5 million commercial square feet were leased at an average rental rate
of $24.68 per square foot, an increase of 19.4% , with average tenant improvements and
leasing costs of $13.36 per square foot. These leasing statistics do not include leases
executed during 2008 for Dulles Station, Phase I, a development property.
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Economic Occupancy
Core
Non-core1
Total
Years Ended December 31,
2008
2007
$ Change % Change
$ 94,802
23,491
$118,293
$ 93,810
8,177
$101,987
$ 32,975
9,452
$ 42,427
$ 31,927
2,641
$ 34,568
$
992
15,314
$16,306
$ 1,048
6,811
$ 7,859
1.1%
187.3%
16.0%
3.3%
257.9%
22.7%
$ 61,827
14,039
$ 75,866
$ 61,883
5,536
$ 67,419
$
(56)
8,503
$ 8,447
(0.1%)
153.6%
12.5%
2008
93.9%
90.4%
93.2%
2007
94.3%
97.9%
94.6%
1 Non-core properties include: 2008 in development—Dulles Station; 2008 acquisition—2445 M Street; 2007
acquisitions—Monument II, Woodholme Center and 2000 M Street
Real estate rental revenue in the office segment increased by $16.3 million in 2008
as compared to 2007 due primarily to acquisition and development properties,
which contributed $15.3 million of the increase. Real estate rental revenue from core
properties increased by $1.0 million primarily due to higher rental rates ($1.1 million),
lease termination fees ($0.6 million) and expense recoveries ($0.4 million), offset by
lower core occupancy ($0.5 million) and higher bad debt ($0.5 million).
Real estate expenses in the office segment increased by $7.9 million in 2008 as
compared to 2007 due primarily to acquisition and development properties, which
contributed $6.8 million of the increase. Real estate expenses from core properties
increased by $1.1 million primarily due to higher real estate taxes ($0.7 million) caused
by higher rates and assessments, as well as higher repairs and maintenance expense
($0.4 million).
Core economic occupancy decreased to 93.9% in 2008 from 94.3% in 2007, driven
by higher vacancy at One Central Plaza, 600 Jefferson Plaza and the Lexington. These
were partially offset by higher economic occupancy at West Gude Drive, Wayne Plaza
and 7900 Westpark. Non-core economic occupancy decreased to 90.4% from 97.9%
46
Annual Report 2009
Form 10-k
due to the lease-up of Dulles Station, Phase I, a development property, as well as lower
occupancy at 2000 M Street. During 2008, 41.9% of the square footage that expired
was renewed compared to 82.1% in 2007, excluding properties sold or classified as
held for sale. During 2008, we executed new leases for 567,700 square feet of office
space at an average rental rate of $32.46 per square foot, an increase of 16.5%, with
average tenant improvements and leasing costs of $20.90 per square foot. These
leasing statistics do not include leases executed during 2008 for Dulles Station, Phase
I, a development property.
Core economic occupancy decreased to 97.7% in 2008 from 98.9% in 2007, driven
by higher vacancy at 8301 Arlington Boulevard and Alexandria Professional Center.
Non-core economic occupancy decreased to 93.9% from 96.1% due to higher vacancy
at Sterling Medical Office Building, Woodholme Medical Center and 2440 M Street.
The sellers of Sterling Medical Office Building are reimbursing us for its vacant space
for a period of 12–18 months from the acquisition date. During 2008, 63.6% of the
square footage that expired was renewed compared to 50.0% in 2007. During 2008,
we executed new leases for 183,300 square feet of medical office space at an average
rental rate of $37.82, an increase of 23.4%, with average tenant improvements and
leasing costs of $26.19 per square foot.
Years Ended December 31,
2008
2007
$ Change % Change
Retail Segment:
Medical Office Segment:
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Economic Occupancy
Core
Non-core1
Total
$29,510
14,084
$43,594
$ 8,897
5,280
$14,177
$20,613
8,804
$29,417
$29,314
8,533
$37,847
$ 8,654
2,997
$11,651
$20,660
5,536
$26,196
$ 196
5,551
$5,747
$ 243
2,283
$2,526
$ (47)
3,268
$3,221
2008
97.7%
93.9%
96.5%
0.7%
65.1%
15.2%
2.8%
76.2%
21.7%
(0.2%)
59.0%
12.3%
2007
98.9%
96.1%
98.3%
1 Non-core properties include: 2008 acquisition—Sterling Medical office Building; 2007 acquisitions—2440 M Street,
Woodholme Medical office Building, Ashburn Farm office Park and CentreMed I & II
Real estate rental revenue in the medical office segment increased by $5.7 million in
2008 as compared to 2007 due primarily to acquisition properties, which contributed
$5.6 million of the increase. Real estate rental revenue from core properties increased
by $0.2 million primarily due to higher rental rates ($0.3 million) and expense recoveries
($0.3 million), partially offset by lower core occupancy ($0.3 million).
Real estate expenses in the medical office segment increased by $2.5 million in 2008 as
compared to 2007 due primarily to acquisition properties, which contributed $2.3 million
of the increase. Real estate expenses from core properties increased by $0.2 million
due to higher real estate taxes ($0.4 million) caused by higher rates and assessments,
partially offset by lower operating services and supplies expense ($0.2 million).
Real Estate Rental Revenue
Total
Real Estate Expenses
Total
NOI
Total
Economic Occupancy
Total
Years Ended December 31,
2008
2007
$ Change % Change
$40,987
$41,512
$ (525)
(1.3%)
$ 9,646
$ 8,921
$ 725
8.1%
$31,341
$32,591
$(1,250)
(3.8%)
2008
94.9%
2007
95.2%
Real estate rental revenue in the retail segment decreased by $0.5 million in 2008
as compared to 2007 due to higher bad debt ($1.0 million) and lower occupancy
($0.1 million), partially offset by higher expense recoveries ($0.5 million) and rental
rates ($0.2 million). The 2008 bad debt and amortization of intangible lease assets
includes write-offs of $0.4 million and $0.4 million, respectively, caused by the
bankruptcy of a major retail tenant.
Real estate expenses in the retail segment increased by $0.7 million in 2008 as
compared to 2007 due to higher real estate taxes ($0.4 million) caused by higher
rates and assessments, as well as the 2008 write-off of a straight-line receivable
($0.3 million) caused by the bankruptcy of a major retail tenant.
Economic occupancy decreased to 94.9% in 2008 from 95.2% in 2007, driven by higher
vacancy at Westminster Shopping Center and Montgomery Village Center. This was
partially offset by lower vacancy at Montrose Shopping Center and South Washington
Street. During 2008, 91.5% of the square footage that expired was renewed compared
to 82.1% in 2007. During 2008, we executed new leases for 186,200 square feet of
retail space at an average rental rate of $26.27, an increase of 26.9%, with average
tenant improvements and leasing costs of $7.91 per square foot.
Form 10-k Washington Real Estate Investment Trust
47
Multifamily Segment:
Industrial Segment:
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Economic Occupancy
Core
Non-core1
Total
Years Ended December 31,
2008
2007
$ Change % Change
Years Ended December 31,
2008
2007
$ Change % Change
$32,199
5,659
$37,858
$13,315
4,121
$17,436
$18,884
1,538
$20,422
$31,089
275
$31,364
$12,823
639
$13,462
$18,266
(364)
$17,902
$1,110
5,384
$6,494
$ 492
3,482
$3,974
$ 618
1,902
$2,520
2008
93.5%
49.6%
83.0%
3.6%
1,957.8%
20.7%
3.8%
544.9%
29.5%
3.4%
(522.5%)
14.1%
2007
91.3%
24.0%
89.2%
Real Estate Rental Revenue
Core
Non-core1
Total real estate rental revenue
Real Estate Expenses
Core
Non-core1
Total real estate expenses
NOI
Core
Non-core1
Total NOI
Economic Occupancy
Core
Non-core1
Total
$34,154
3,805
$37,959
$8,767
1,046
$9,813
$25,387
2,759
$28,146
$33,840
2,349
$36,189
$ 8,221
536
$ 8,757
$25,619
1,813
$27,432
$ 314
1,456
$1,770
$ 546
510
$1,056
$ (232)
946
$ 714
2008
94.1%
90.9%
93.8%
0.9%
62.0%
4.9%
6.6%
95.1%
12.1%
(0.9%)
52.2%
2.6%
2007
95.2%
96.2%
95.2%
1 Non-core properties include: 2008 in development—Clayborne Apartments; 2007 in development—Bennett Park;
1 Non-core properties include: 2008 acquisition—6100 Columbia Park road; 2007 acquisition—270 Technology Park
2008 acquisition—Kenmore Apartments
Real estate rental revenue in the multifamily segment increased by $6.5 million in
2008 as compared to 2007 due primarily to acquisition and development properties,
which contributed $5.4 million of the increase. Real estate rental revenue from core
properties increased by $1.1 million due primarily to higher rental rates ($0.3 million)
and higher core occupancy ($0.7 million).
Real estate expenses in the multifamily segment increased by $4.0 million in 2008 as
compared to 2007 due primarily to acquisition and development properties, which
contributed $3.5 million of the increase. Real estate expenses from core properties
increased by $0.5 million due primarily to higher administrative expenses ($0.3 million)
driven by increased personnel and marketing costs, as well as higher real estate taxes
($0.1 million) caused by higher rates and assessments.
Core economic occupancy increased to 93.5% in 2008 from 91.3% in 2007, driven
by higher occupancy at Roosevelt Towers and Bethesda Hill Apartments. Non-core
economic occupancy increased to 49.6% from 24.0% , reflecting the continuing lease-up
of Bennett Park and Clayborne Apartments.
Real estate rental revenue in the industrial segment increased by $1.8 million in 2008
as compared to 2007 due primarily to acquisition properties, which contributed
$1.5 million of the increase. Real estate rental revenue from core properties increased
by $0.3 million due primarily to higher rental rates ($1.0 million), higher recoveries
of operating expenses ($0.6 million), partially offset by higher bad debt ($0.9 million)
and lower core occupancy ($0.4 million).
Real estate expenses in the industrial segment increased by $1.1 million in 2008
as compared to 2007 due primarily to acquisition and development properties,
which contributed $0.5 million of the increase. Real estate expenses from core
properties increased by $0.6 million due to higher real estate taxes caused by higher
rates and assessments.
Core economic occupancy decreased to 94.1% in 2008 from 95.2% in 2007, driven by
higher vacancy at Ammendale Technology Park and NVIP I & II. These were partially
offset by higher economic occupancy at Sully Square and 9950 Business Parkway. Non-
core economic occupancy decreased to 90.9% from 96.2% due to higher vacancy
at 270 Tech Park and 6100 Columbia Park Drive. During 2008, 62.0% of the square
footage that expired was renewed compared to 83.7% in 2007, excluding properties
sold or classified as held for sale. During 2008, we executed new leases for 570,900
48
Annual Report 2009
Form 10-k
square feet of industrial space at an average rental rate of $12.19, an increase of 18.5% ,
with average tenant improvements and leasing costs of $3.53 per square foot.
Liquidity and Capital Resources
Capital Structure
We manage our capital structure to reflect a long-term investment approach, generally
seeking to match the cash flow of our assets with a mix of equity and various debt
instruments. We expect that our capital structure will allow us to obtain additional
capital from diverse sources that could include additional equity offerings of common
shares, public and private secured and unsecured debt financings, and possible asset
dispositions. Our ability to raise funds through the sale of debt and equity securities
is dependent on, among other things, general economic conditions, general market
conditions for REITs, our operating performance, our debt rating and the current trading
price of our common shares. We analyze which source of capital we believe to be most
advantageous to us at any particular point in time. However, the capital markets may
not consistently be available on terms that we consider attractive. In particular, as a
result of the recent economic downturn and turmoil in the capital markets, investor
interest in securities issued by REIT’s, both debt and equity, remains unpredictable.
During certain periods in the recent past, debt capital was essentially unavailable for
extended periods of time. While debt markets have materially improved, we cannot
predict if the improvement is sustainable.
We currently expect that our potential sources of liquidity for acquisitions, development,
expansion and renovation of properties, and operating and administrative expenses,
may include:
• Cash flow from operations;
• Borrowings under our unsecured credit facilities or other short-term facilities;
• Issuances of our equity securities and/or common units in our operating
partnership;
• Proceeds from long-term secured or unsecured debt financings;
• Investment from joint venture partners; and
• Net proceeds from the sale of assets.
During 2010, we expect that we will have modest capital requirements, including the
following items. There can be no assurance that our capital requirements will not be
materially higher or lower than these expectations.
• Funding dividends on our common shares and noncontrolling interest distributions
to third party unit holders;
• Approximately $35.0–$45.0 million to invest in our existing portfolio of operating
assets, including approximately $20.0–$25.0 million to fund tenant-related capital
requirements and leasing commissions;
• Approximately $5.0 million to fund first generation tenant-related capital
requirements and leasing commissions;
• Approximately $3.0 million to invest in our development projects; and
• Approximately $50.0–$150.0 million to fund our expected property acquisitions.
We currently believe that we will generate sufficient cash flow from operations and
have access to the capital resources necessary to fund our requirements. However, as a
result of general market conditions in the greater Washington metro region, economic
downturns affecting the ability to attract and retain tenants, unfavorable fluctuations
in interest rates or our share price, unfavorable changes in the supply of competing
properties, or our properties not performing as expected, we may not generate
sufficient cash flow from operations or otherwise have access to capital on favorable
terms, or at all. If we are unable to obtain capital from other sources, we may need
to alter capital spending needs which may limit growth. If capital were not available,
we may not be able to pay the dividend required to maintain our status as a REIT,
make required principal and interest payments, make strategic acquisitions or make
necessary routine capital improvements or undertake re-development opportunities
with respect to our existing portfolio of operating assets.
Debt Financing
We generally use secured or unsecured, corporate-level debt, including mortgages,
unsecured notes and our unsecured credit facilities, to meet our borrowing needs.
Long-term, we generally use fixed rate debt instruments in order to match the returns
from our real estate assets. We also utilize variable rate debt for short-term financing
purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At
those times, we may use derivative financial instruments including interest rate swaps
and caps, forward interest rate options or interest rate options in order to assist us
in managing our debt mix. We may either hedge our variable rate debt to give it an
effective fixed interest rate or hedge fixed rate debt to give it an effective variable
interest rate.
Typically we have obtained the ratings of two credit rating agencies in the underwriting
of our unsecured debt. As of December 31, 2009, Standard & Poor’s had assigned
its BBB+ rating with a stable outlook, and Moody’s Investor Service had assigned its
Baa1 rating with a stable outlook, to our unsecured notes. A downgrade in rating by
either of these rating agencies could result from, among other things, a change in our
financial position. Any such downgrade could adversely affect our ability to obtain
future financing or could increase the interest rates on our existing debt. However,
we have no debt instruments under which the principal maturity would be accelerated
upon a downward change in our debt rating. A rating is not a recommendation to buy,
sell or hold securities, and each rating is subject to revision or withdrawal at any time
by the assigning rating organization.
Form 10-k Washington Real Estate Investment Trust
49
Our total debt at December 31, 2009 and 2008 is summarized as follows
(in thousands):
Fixed rate mortgages
Unsecured credit facilities
Unsecured notes payable
2009
$ 405,451
128,000
688,912
$1,222,363
2008
$ 421,486
67,000
890,679
$1,379,165
If principal amounts due at maturity cannot be refinanced, extended or paid with
proceeds of other capital transactions, such as new equity capital, our cash flow may
be insufficient to repay all maturing debt. Prevailing interest rates or other factors at
the time of a refinancing, such as possible reluctance of lenders to make commercial
real estate loans, may result in higher interest rates and increased interest expense or
inhibit our ability to finance our obligations.
Mortgage Debt
At December 31, 2009, our $405.5 million in fixed rate mortgages, which includes a net
$7.4 million in unamortized discounts due to fair value adjustments, bore an effective
weighted average fair value interest rate of 5.9% and had a weighted average maturity
of 6.8 years. We may either initiate secured mortgage debt or assume mortgage debt
from time-to-time in conjunction with property acquisitions.
On February 17, 2009, we executed a mortgage note of $37.5 million at a fixed rate
of 5.37% per annum for a term of ten years, supported by Kenmore Apartments. The
proceeds from the note were used to pay down borrowings under our lines of credit
and to repurchase a portion of our convertible notes.
On July 1, 2009, we used a portion of the proceeds of the May 2009 equity offering
to prepay the $50 million mortgage that was to mature in October 2009 without any
prepayment penalties.
Unsecured Credit Facilities
Our primary source of liquidity is our two revolving credit facilities. We can borrow
up to $337.0 million under these lines, which bear interest at an adjustable spread over
LIBOR based on our public debt rating.
Credit Facility No. 1 is a four-year, $75.0 million unsecured credit facility expiring in
June 2011, and may be extended for one year at our option. We had $28.0 million
outstanding and $1.4 million in letters of credit issued as of December 31, 2009, related
to Credit Facility No. 1. Borrowings under the facility bear interest at our option of
LIBOR plus a spread based on the credit rating on our publicly issued debt or the
higher of SunTrust Bank’s prime rate and the Federal Funds Rate in effect plus 0.5%.
The interest rate spread is currently 42.5 basis points. All outstanding advances are
due and payable upon maturity in June 2011, and may be extended for one year at
our option. Interest only payments are due and payable generally on a monthly basis.
In addition, we pay a facility fee based on the credit rating of our publicly issued debt
which currently equals 0.15% per annum of the $75.0 million committed capacity,
without regard to usage. Rates and fees may be adjusted up or down based on changes
in our senior unsecured credit ratings.
Credit Facility No. 2 is a four-year $262.0 million unsecured credit facility expiring
in November 2010, and may be extended for one year at our option. We had
$100.0 million outstanding and $0.9 million in letters of credit issued as of December 31,
2009, related to Credit Facility No. 2. Advances under this agreement bear interest
at our option of LIBOR plus a spread based on the credit rating of our publicly issued
debt or the higher of Wells Fargo Bank’s prime rate and the Federal Funds Rate in
effect on that day plus 0.5% . The interest rate spread is currently 42.5 basis points.
The $100.0 million outstanding balance was used to prepay the $100 million term
loan, and the interest rate on this $100.0 million in borrowings is effectively fixed
by interest rate swaps (see note 6 to the consolidated financial statements). An
interest rate swap currently fixes the interest rate at 3.375% (2.95% plus the 42.5
basis point spread) through February 19, 2010, the terminal date for the swap. At this
point in time, a forward interest rate swap becomes effective on February 20, 2010.
We anticipate that the interest rate on the $100.0 million borrowing will be 2.525%
(2.10% plus 42.5 basis points) through the forward interest rate swap’s maturity date
of November 1, 2011. All outstanding advances are due and payable upon maturity
in November 2010, and may be extended for one year at our option. Interest only
payments are due and payable generally on a monthly basis. Credit Facility No. 2
requires us to pay the lender a facility fee on the total commitment of 0.15% per
annum. These fees are payable quarterly.
Our unsecured credit facilities contain financial and other covenants with which we
must comply. Some of these covenants include:
• A minimum tangible net worth;
• A maximum ratio of total liabilities to gross asset value, calculated using an
estimate of fair market value of our assets;
• A maximum ratio of secured indebtedness to gross asset value, calculated using
an estimate of fair market value of our assets;
• A minimum ratio of annual EBITDA (earnings before interest, taxes, depreciation
and amortization) to fixed charges, including interest expense;
• A minimum ratio of unencumbered asset value, calculated using a fair value of our
assets, to unsecured indebtedness;
• A minimum ratio of net operating income from our unencumbered properties to
unsecured interest expense; and
• A maximum ratio of permitted investments to gross asset value, calculated using
an estimate of fair market value of our assets.
50
Annual Report 2009
Form 10-k
Failure to comply with any of the covenants under our unsecured credit facilities
or other debt instruments could result in a default under one or more of our debt
instruments. This could cause our lenders to accelerate the timing of payments and
would therefore have a material adverse effect on our business, operations, financial
condition and liquidity. As of December 31, 2009, we were in compliance with our loan
covenants. In addition, our ability to draw on our unsecured credit facilities or incur
other unsecured debt in the future could be restricted by the loan covenants.
We anticipate that in the near term we may rely to a greater extent upon our unsecured
credit facilities and potentially maintain balances on our unsecured credit facilities for
longer periods than has been our historical practice. To the extent that we maintain
larger balances on our unsecured credit facilities or maintain balances on our unsecured
credit facilities for longer periods, adverse fluctuations in interest rates could have a
material adverse effect on earnings.
Unsecured Notes
We generally issue unsecured notes to fund our real estate assets long-term. In issuing
future unsecured notes, we intend to ladder the maturities of our debt to mitigate
exposure to interest rate risk in future years.
Depending upon market conditions, opportunities to issue unsecured notes on
attractive terms may not be available. During periods in the recent past, debt capital
was essentially unavailable for extended periods of time. While debt markets have
materially improved, it is difficult to predict if the improvement is sustainable.
Our unsecured notes have maturities ranging from June 2011 through February 2028,
as follows (in thousands):
5.95% notes due 2011
5.05% notes due 2012
5.125% notes due 2013
5.25% notes due 2014
5.35% notes due 2015
3.875% notes due 20261
7.25% notes due 2028
December 31, 2009
Note Principal
$150,000
50,000
60,000
100,000
150,000
134,328
50,000
$694,328
1 on or after September 20, 2011, we may redeem the convertible notes at a redemption price equal to the principal
amount of the notes plus any accrued and unpaid interest, if any, up to, but excluding, the purchase date. In addition,
on September 15, 2011, September 15, 2016 and September 15, 2021 or following the occurrence of certain change
in control transactions prior to September 15, 2011, holders of these notes may require us to repurchase the notes for
an amount equal to the principal amount of the notes plus any accrued and unpaid interest thereon.
Our unsecured notes contain covenants with which we must comply. These include:
• Limits on our total indebtedness;
• Limits on our secured indebtedness;
• Limits on our required debt service payments; and
• Maintenance of a minimum level of unencumbered assets.
Failure to comply with any of the covenants under our unsecured notes could result in a
default under one or more of our debt instruments. This could cause our debt holders
to accelerate the timing of payments and would therefore have a material adverse
effect on our business, operations, financial condition and liquidity. As of December 31,
2009, we were in compliance with our unsecured notes covenants.
During 2009, we repurchased $109.7 million of our 3.875% convertible notes at an
average price of 87.9% of par, resulting in a gain on extinguishment of debt of $6.8 million.
During 2008, we repurchased $16.0 million of our 3.87% convertible notes at 75.0% of
par, resulting in a gain on extinguishment of debt of $2.9 million.
We may from time to time seek to repurchase and cancel our outstanding notes
through open market purchases, privately negotiated transactions or otherwise.
Such repurchases, if any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors. The amounts involved may
be material.
Term Loan
On May 7, 2009, we entered into an agreement to modify our $100 million term loan
with Wells Fargo, National Association to extend the maturity date from February 19,
2010 to November 1, 2011. This agreement also increased the interest rate on the
$100 million term loan from LIBOR plus 1.50% to LIBOR plus 2.75%. To hedge our
exposure to interest rate fluctuations on the $100 million term loan, we previously had
entered into an interest rate swap on a notional amount of $100 million through the
original maturity date of February 19, 2010. This interest rate swap had the effect of
fixing the LIBOR portion of the interest rate on the $100 million term loan at 2.95%
through February 2010. The interest rate after the agreement to extend the maturity
date, taking into account the swap, was 5.70% (2.95% plus 275 basis points). On
May 6, 2009, we entered into a forward interest rate swap on a notional amount of
$100 million for the period from February 20, 2010 through the maturity date of
November 1, 2011. This forward interest rate swap had the effect of fixing the LIBOR
portion of the interest rate on the $100 million term loan at 2.10% from February 20,
2010 through November 1, 2011. The interest rate for that time period, taking into
account the forward interest rate swap, would have been 4.85% (2.10% plus 275
basis points). The forward interest rate swap agreement is scheduled to settle
contemporaneously with the maturity of the $100 million term loan.
Form 10-k Washington Real Estate Investment Trust
51
On December 1, 2009, we prepaid the $100 million term loan using proceeds from
our unsecured line of credit (see note 5 to the consolidated financial statements),
incurring a loss on extinguishment of debt of $1.5 million. The interest rate swaps
discussed in the preceding paragraph are now used to fix the current interest
rate on the $100.0 million borrowing on our unsecured lines of credit at 3.375%
(2.95% plus the 42.5 basis point spread on our unsecured lines of credit). When the
forward interest rate swap becomes effective on February 20, 2010, we anticipate
that the interest rate on the $100.0 million borrowing will be 2.525% (2.10%
plus 42.5 basis points) through the forward interest rate swap’s maturity date of
November 1, 2011.
Common Equity
We have authorized for issuance 100.0 million common shares, of which 59.8 million
shares were outstanding at December 31, 2009.
During the second quarter of 2009, we completed a public offering of 5.25 million
common shares priced at $21.40 per share, raising $107.5 million in net proceeds. The
net proceeds were used to repay a mortgage note payable, borrowings under our
unsecured lines of credit and for general corporate purposes.
During the fourth quarter of 2009, we entered into a sales agency financing agreement
with BNY Mellon Capital Markets, LLC relating to the issuance and sale of up to
$250.0 million of the our common shares from time to time over a period of no more
than 36 months, replacing a previous agreement made during the third quarter of
2008. Sales of our common shares are made at market prices prevailing at the time of
sale. Net proceeds for the sale of common shares under this program are used for the
repayment of borrowings under our lines of credit, acquisitions, and general corporate
purposes. During 2009, we issued 2.0 million common shares at a weighted average
price of $27.37 under this program, raising $53.8 million in net proceeds. During 2008,
we issued 1.1 million common shares at a weighted average price of $36.15 under this
program, raising $40.7 million in net proceeds.
We have a dividend reinvestment program, whereby shareholders may use their
dividends and optional cash payments to purchase common shares. The common
shares sold under this program may either be common shares issued by us or
common shares purchased in the open market. We used the net proceeds under
this program for general corporate purposes. During 2009, we issued 88,460
common shares at a weighted average price of $28.34 per share, raising $2.5 million
in net proceeds.
Dividends
We pay dividends quarterly. The maintenance of these dividends is subject to various
factors, including the discretion of our Board of Trustees, our results of operations,
the ability to pay dividends under Maryland law, the availability of cash to make the
necessary dividend payments and the effect of REIT distribution requirements, which
require at least 90% of our taxable income to be distributed to shareholders. The
table below details our dividend and distribution payments for 2009, 2008 and 2007
(in thousands).
Common dividends
Noncontrolling interest distributions
2009
$100,221
190
$100,411
2008
$85,564
192
$85,756
2007
$78,050
156
$78,206
Dividends paid for 2009 as compared to 2008 increased as a direct result of a dividend
rate increase from $1.72 per share in 2008 to $1.73 per share in 2009. The dividends paid
also increased due to our issuance of 5.25 million shares pursuant to a public offering and
our issuance of 2.0 million under our sales agency financing agreement during 2009.
Dividends paid for 2008 as compared to 2007 increased as a direct result of a dividend
rate increase from $1.68 per share in 2007 to $1.72 per share in 2008. The dividends paid
also increased due to our issuance of 4.325 million shares pursuant to public offerings and
our issuance of 1.1 million under our sales agency financing agreement during 2008.
Cash flows from operations are an important factor in our ability to sustain our dividend
at its current rate. Cash flows from operations increased to $102.9 million in 2009 from
$97.1 million in 2008, primarily due to higher income from real estate operations. If our
cash flows from operations were to decline significantly, we may have to borrow on our
lines of credit to sustain the dividend rate or reduce our dividend.
Capital Commitments
We will require capital for development and redevelopment projects currently underway
and in the future. As of December 31, 2009, we had under development Dulles Station
Phase II and 4661 Kenmore, in which we had invested $27.1 million and $5.2 million,
respectively. We are also evaluating a number of potential redevelopment projects
at properties such as Montrose and 7900 Westpark. There were no projects placed
into service in 2009. As of December 31, 2009, we were committed to approximately
$0.6 million of development spending during 2010, including $0.4 million of Dulles
Station Phase I tenant related capital.
52
Annual Report 2009
Form 10-k
We anticipate funding several major renovation projects in our portfolios during 2010,
as follows (in thousands):
Segment
Office buildings
Medical office buildings
Retail centers
Multifamily
Industrial
Total
Project Spending
$4,361
781
964
644
62
$6,812
terms on cancelable leases are generally one year or less. We are currently committed
to fund tenant-related capital improvements as described in the table above for
executed leases. However, expected leasing levels could require additional tenant-
related capital improvements which are not currently committed. We expect that
total tenant-related capital improvements, including those already committed, will be
approximately $25.7 million in 2010. Due to the competitive office leasing market we
expect that tenant-related capital costs will continue at this level into 2011.
Historical Cash Flows
Consolidated cash flow information is summarized as follows (in millions):
These projects include elevator, restroom and common area renovations at several
of our office and medical properties, roof replacement projects at some of our retail
properties, fire alarm and sprinkler system upgrades at one of our multifamily properties
and electrical upgrades at some of our industrial properties. Not all of the anticipated
spending had been committed via executed construction contracts at December 31,
2009. We expect to meet our requirements using cash generated by our real estate
operations, through borrowings on our unsecured credit facilities, or raising additional
debt or equity capital in the public market.
Cash provided by operating activities
Cash used in investing activities
Cash provided by (used in)
financing activities
For the Year Ended
December 31,
2009
$102.9
$ (12.8)
2008
$ 97.1
$(181.4)
2007
$ 116.5
$(349.1)
Variance
2009 vs.
2008
$
5.8
$ 168.6
2008 vs.
2007
$ (19.4)
$ 167.7
$ (90.8)
$ 74.7
$ 245.4
$(165.5)
$(170.7)
Contractual Obligations
Below is a summary of certain contractual obligations that will require significant capital
(in thousands):
Operations generated $102.9 million of net cash in 2009 compared to $97.1 million
in 2008. The increase in cash provided by operating activities in 2009 as compared to
2008 was primarily due to higher income from real estate operations.
Payments Due by Period
Total
$1,556,393
18,724
584
8,332
10,300
100
Less than
1 Year
$165,417
10,848
584
6,995
10,300
50
1–3 Years
$699,270
7,876
4–5 Years
$324,368
—
—
1,337
—
50
—
—
—
—
After 5
Years
$367,338
—
—
—
—
—
Long-term debt1
Purchase obligations2
Estimated development
commitments3
Tenant-related capital4
Building capital5
Operating leases
1
2
3
4
5
See Notes 4, 5 and 6 of our consolidated financial statements. Amounts include principal, interest, unused commitment
fees and facility fees.
represents elevator maintenance contracts with terms through 2010, electricity sales agreements with terms through
2012, and natural gas purchase agreements with terms through 2011.
Committed development obligations based on contracts in place as of December 31, 2009.
Committed tenant-related capital based on executed leases as of December 31, 2009.
Committed building capital additions based on contracts in place as of December 31, 2009.
We have various standing or renewable contracts with vendors. The majority of
these contracts are cancelable with immaterial or no cancellation penalties, with the
exception of our elevator maintenance, electricity sales and natural gas purchase
agreements, which are included above on the purchase obligations line. Contract
Operations generated $97.1 million of net cash in 2008 compared to $116.5 million
in 2007. The decrease in cash provided by operating activities in 2008 as compared
to 2007 was primarily due to higher interest payments, lower prepaid rents and the
payout of contractors’ retainage related to our development projects.
Our investing activities used net cash of $12.8 million in 2009 and $181.4 million in
2008. The decrease in cash used by investing activities in 2009 was primarily due to the
decrease in cash invested in acquisitions, net of assumed debt, throughout 2009, which
was $148.4 million lower than 2008.
Our investing activities used net cash of $181.4 million in 2008 and $349.1 million in
2007. The decrease in cash used by investing activities in 2008 was primarily due to
the $168.2 million of cash invested in acquisitions, net of assumed debt, throughout
2008, which was $125.9 million lower than 2007. In addition, cash spent on our
development projects decreased to $15.5 million from $67.0 million in 2007, as our
three major development projects (Bennett Park, Clayborne Apartments and Dulles
Station, Phase I) were completed and placed into service during 2007 and 2008.
Our financing activities used net cash of $90.8 million in 2009 and provided $74.7 million
in 2008. The net increase in net cash used by financing activities in 2009 was primarily
the result of using cash from operations and the proceeds from equity issuances,
Form 10-k Washington Real Estate Investment Trust
53
property sales and a new mortgage note to pay dividends, repurchase convertible
notes and prepay a mortgage note.
Our financing activities provided net cash of $74.7 million in 2008 and $245.4 million
in 2007. The decrease in net cash provided by financing activities in 2008 was
primarily the result of using much of the borrowings and proceeds from equity
issuances to pay down the lines of credit and to pay off the $60 million MOPPRS
debt and the related $8.4 million loss on extinguishment. Also, on December 17,
2008 we repurchased $16.0 million of the convertible notes for $12.5 million. The
2007 borrowings and proceeds from equity issuance were primarily used for the
acquisition of new properties.
Capital Improvements and Development Costs
Capital improvements and development costs of $29.5 million were completed in
2009, including tenant improvements. Capital improvements and development costs in
2008 and 2007 were $52.8 million and $108.1 million, respectively. We consider capital
improvements to be accretive to revenue but not necessarily to net income.
Our capital improvement and development costs for the three years ending
December 31, 2009 were as follows (in thousands):
Year Ended December 31,
2008
2009
2007
Accretive capital improvements:
Acquisition related
Expansions and major renovations
Development/redevelopment
Tenant improvements (including first generation leases)
Total accretive capital improvements
Other:
Total
$ 2,696
5,557
2,135
12,874
23,262
6,210
$29,472
$ 6,012
9,591
15,509
11,359
42,471
10,310
$52,781
$ 1,954
10,684
66,996
16,587
96,221
11,897
$108,118
Accretive Capital Improvements
Acquisition Related Improvements: Acquisition related improvements are capital
improvements to properties acquired during the preceding three years which were
anticipated at the time we acquired the properties. These types of improvements
were made in 2009 to 6100 Columbia Park Drive, 2440 M Street NW, 2000 M Street,
Sterling Medical and Alexandria Professional Center.
Expansions and Major Renovations: Expansion projects increase the rentable area of a
property, while major renovation projects are improvements sufficient to increase the
income otherwise achievable at a property. 2009 expansions and major renovations
included garage renovations at 7900 Westpark; elevator modernization and garage
renovations at One Central Plaza; elevator modernization at Walker House
54
Annual Report 2009
Form 10-k
apartments; common area and unit renovations for Bethesda Hill and Park Adams
apartments; roof replacement at Montgomery Village Center; elevator and lobby
modernization at Alexandria Professional Center; and lobby and corridor renovations
at 8301 Arlington Boulevard.
Development/Re-development: Development costs represent expenditures for ground
up development of new operating properties. Re-development costs represent
expenditures for improvements intended to re-position properties in their markets and
increase income that would otherwise be achievable. Development costs in each of the
years presented include costs associated with the ground up development of Dulles
Station, Bennett Park and Clayborne. Completion of Bennett Park, our residential
project under development in Arlington, VA, occurred in the third quarter 2007 for
the mid-rise building and fourth quarter 2007 for the high-rise building. Completion
of Clayborne Apartments, our residential project under construction in Alexandria,
VA, occurred in the first quarter 2008. Completion of Phase I of Dulles Station, our
540,000 square foot office project in Herndon, VA, of which Phase I represents 180,000
square feet, occurred in the third quarter of 2007 and the property was substantially
leased in the third quarter of 2008. Additionally in 2007, we acquired land for future
development of medical office space at 4661 Kenmore in Alexandria, VA. Development
spending in 2009 and 2008 includes pre-development activities related to this project.
In 2007, re-development costs were incurred for the Shoppes of Foxchase, which was
substantially completed in 2006.
Tenant Improvements: Tenant improvements are costs, such as space build-out,
associated with commercial lease transactions. Our average Tenant Improvement
Costs per square foot of space leased, excluding first generation leases, were as follows
during the three years ended December 31, 2009:
Office Buildings*
Medical Office Buildings
Retail Centers
Industrial/Flex Properties*
2009
$11.68
$14.33
$ 3.91
$ 1.03
Year Ended December 31,
2008
$13.03
$19.12
$ 3.61
$ 1.71
2007
$13.59
$13.95
$ 1.84
$ 2.61
*Excludes properties sold or classified as held for sale.
The $1.35 decrease in tenant improvement costs per square foot of space leased
for office buildings in 2009 was primarily due to a decrease in the per square foot
cost associated with expansion leases, due to leases executed with a single tenant in
2008 requiring $1.1 million in tenant improvements. The $0.56 decrease in tenant
improvement costs per square foot of space leased for office buildings in 2008 was
primarily due to leases executed at 6110 Executive Boulevard and 30 West Gude
requiring $1.3 million and $0.7 million, respectively, in tenant improvements in 2007,
including $1.1 million and $0.4 million, respectively, for a single tenant. The $4.79
decrease in 2009 and $5.17 increase in 2008 in tenant improvement costs per square
foot of space leased for medical office buildings was primarily due to leases executed
at Woodburn II in 2008, requiring $1.6 million in tenant improvements, including
$1.2 million for a single tenant; and at 8503 Arlington Boulevard, for leases in 2008
requiring $0.5 million in improvements for a single tenant. The $0.30 increase
in tenant improvement costs per square foot of retail space leased in 2009 was
primarily due to a single lease executed at the Centre at Hagerstown, requiring
$0.7 million in tenant improvements. The $1.77 increase in tenant improvement
costs per square foot of retail space leased in 2008 was primarily due to a single
lease executed at Montrose Center, requiring $0.5 million in tenant improvements.
The $0.68 decrease in tenant improvement costs per square foot of industrial space
leased in 2009 was primarily due to an increase in the percentage of renewal, as
opposed to new, leases executed, combined with a decrease in the average tenant
size, requiring lower tenant improvement expenditures. The $0.90 decrease in tenant
improvement costs per square foot of industrial space leased in 2008 was primarily
due to leases executed in 2007 at Dulles Business Park and Gorman Road requiring
$0.8 million and $0.4 million, respectively, in tenant improvements, entirely for single
tenants. The retail and industrial tenant improvement costs are substantially lower
than office and medical office improvement costs due to the tenant improvements
required in these property types being substantially less extensive than in office and
medical. Excluding properties sold or classified as held for sale, approximately 67%
of our tenants renewed their leases with us in 2009, compared to 62% in 2008 and
80% in 2007. Renewing tenants generally require minimal tenant improvements. In
addition, lower tenant improvement costs are one of the many benefits of our focus
on leasing to smaller office tenants. Smaller office suites have limited configuration
alternatives. Therefore, we are often able to lease an existing suite with limited
tenant improvements.
Other Capital Improvements
Other capital improvements are those not included in the above categories. These
are also referred to as recurring capital improvements. Over time these costs will
be recurring in nature to maintain a property’s income and value. In our multifamily
properties, these include new appliances, flooring, cabinets and bathroom fixtures.
These improvements, which are made as needed upon vacancy of an apartment,
totaled $0.6 million in 2009, and averaged $505 per apartment for the 46% of
apartments turned over relative to our total portfolio of apartment units. In our
commercial properties and multifamily properties aside from apartment turnover
discussed above, improvements include installation of new heating and air conditioning
equipment, asphalt replacement, new signage, permanent landscaping, window
replacements, new lighting and new finishes. In addition, during 2009, we incurred
repair and maintenance expenses of $12.1 million that were not capitalized, to maintain
the quality of our buildings.
Forward-Looking Statements
This Form 10-K contains forward-looking statements which involve risks and
uncertainties. Such forward looking statements include each of the statements in “Item
1: Business” and “Item 7: Management’s Discussion and Analysis of Financial Condition
and Results of Operations” concerning the Washington metro region’s economy, gross
regional product, unemployment and job growth and real estate market performance.
Such forward-looking statements also include the following statements with respect to
WRIT: (a) our intention to invest in properties that we believe will increase in income
and value; (b) our belief that external sources of capital will continue to be available
and that additional sources of capital will be available from the sale of common shares
or notes; and (c) our belief that we have the liquidity and capital resources necessary to
meet our known obligations and to make additional property acquisitions and capital
improvements when appropriate to enhance long-term growth. Forward-looking
statements also include other statements in this report preceded by, followed by or
that include the words “believe,” “expect,” “intend,” “anticipate,” “potential,” “project,”
“will” and other similar expressions.
We claim the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995 for the foregoing statements. The
following important factors, in addition to those discussed elsewhere in this Form 10-K,
could affect our future results and could cause those results to differ materially from
those expressed in the forward-looking statements: (a) the effect of the recent credit
and financial market conditions; (b) the availability and cost of capital; (c) fluctuations in
interest rates; (d) the economic health of our tenants; (e) the timing and pricing of lease
transactions; (f) the economic health of the greater Washington Metro region, or other
markets we may enter; (g) the effects of changes in Federal government spending; (h)
the supply of competing properties; (i) consumer confidence; (j) unemployment rates;
(k) consumer tastes and preferences; (l) our future capital requirements; (m) inflation;
(n) compliance with applicable laws, including those concerning the environment
and access by persons with disabilities; (o) governmental or regulatory actions and
initiatives; (p) changes in general economic and business conditions; (q) terrorist
attacks or actions; (r) acts of war; (s) weather conditions; (t) the effects of changes in
capital available to the technology and biotechnology sectors of the economy, and (u)
other factors discussed under the caption “Risk Factors.” We undertake no obligation
to update our forward-looking statements or risk factors to reflect new information,
future events, or otherwise.
Form 10-k Washington Real Estate Investment Trust
55
Ratios of Earnings to Fixed Charges and Debt Service Coverage
The following table sets forth our ratios of earnings to fixed charges and debt service
coverage for the periods shown:
Earnings to fixed charges
Debt service coverage
2009
1.32x
2.49x
Year Ended December 31,
2008
1.07x
2.21x
2007
1.25x
2.42x
We computed the ratio of earnings to fixed charges by dividing earnings by fixed
charges. For this purpose, earnings consist of income from continuing operations
attributable to the controlling interests plus fixed charges, less capitalized interest.
Fixed charges consist of interest expense, including amortized costs of debt issuance,
and interest costs capitalized.
We computed the debt service coverage ratio by dividing EBITDA (which is earnings
before interest income and expense, taxes, depreciation, amortization and gain on sale
of real estate) by interest expense and principal amortization.
Funds From Operations
FFO is a widely used measure of operating performance for real estate companies. We
provide FFO as a supplemental measure to net income calculated in accordance with GAAP.
Although FFO is a widely used measure of operating performance for REITs, FFO does
not represent net income calculated in accordance with GAAP. As such, it should not be
considered an alternative to net income as an indication of our operating performance. In
addition, FFO does not represent cash generated from operating activities in accordance
with GAAP, nor does it represent cash available to pay distributions and should not
be considered as an alternative to cash flow from operating activities, determined in
accordance with GAAP, as a measure of our liquidity. The National Association of Real
Estate Investment Trusts, Inc. (“NAREIT”) defines FFO (April, 2002 White Paper) as
net income (computed in accordance with GAAP) excluding gains (or losses) from sales
of property plus real estate depreciation and amortization. We consider FFO to be a
standard supplemental measure for REITs because it facilitates an understanding of the
operating performance of our properties without giving effect to real estate depreciation
and amortization, which historically assumes that the value of real estate assets diminishes
predictably over time. Since real estate values have instead historically risen or fallen with
market conditions, we believe that FFO more accurately provides investors an indication
of our ability to incur and service debt, make capital expenditures and fund other needs.
Our FFO may not be comparable to FFO reported by other REITs. These other REITs
may not define the term in accordance with the current NAREIT definition or may
interpret the current NAREIT definition differently.
The following table provides the calculation of our FFO and a reconciliation of FFO to
net income for the years presented (in thousands):
Net income attributable to the controlling interests
Adjustments
Depreciation and amortization
Gain on sale of real estate
Gain from non-disposal activities
Discontinued operations depreciation
and amortization
FFO as defined by NAREIT
2009
$ 40,745
2008
$ 27,082
2007
$ 57,451
94,042
(13,348)
(73)
85,659
(15,275)
(17)
68,364
(25,022)
(1,303)
405
$121,771
1,239
$ 98,688
2,661
$102,151
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
The principal material financial market risk to which we are exposed is interest rate
risk. Our exposure to interest rate risk relates primarily to refinancing long-term fixed
rate obligations, the opportunity cost of fixed rate obligations in a falling interest
rate environment and our variable rate lines of credit. We primarily enter into debt
obligations to support general corporate purposes, including acquisition of real estate
properties, capital improvements and working capital needs. In the past we have used
interest rate hedge agreements to hedge against rising interest rates in anticipation of
imminent refinancing or new debt issuance.
56
Annual Report 2009
Form 10-k
The table below presents principal, interest and related weighted average fair value interest rates by year of maturity, with respect to debt outstanding on December 31, 2009.
(in thousands)
Unsecured fixed rate debt
Principal
Interest payments
Interest rate on debt maturities
Unsecured variable rate debt
Principal
Variable interest rate on debt maturities2
Mortgages
2010
2011
2012
2013
2014
Thereafter
Total
Fair Value
—
$ 36,630
—
$284,328
$ 32,168
$50,000
$21,238
$ 60,000
$ 18,438
$100,000
$ 14,275
$200,000
$ 52,949
$694,328
$175,698
$693,620
5.91%
5.06%
5.23%
5.34%
5.85%
5.69%
$100,0001
3.39%
$ 28,000
0.66%
—
—
—
—
—
—
—
—
$128,000
2.79%
$128,000
Principal amortization (30 year schedule)
Interest payments
Weighted average interest rate on principal amortization
$ 4,510
$ 23,869
$ 13,788
$ 23,507
$21,823
$22,203
$107,123
$ 16,600
$ 2,038
$ 15,011
$263,579
$ 43,853
$412,861
$145,043
$406,982
5.48%
5.33%
4.93%
5.58%
5.50%
6.20%
5.92%
1
2
This $100.0 million borrowing was made under a line of credit which matures in 2010 and bears interest at a variable rate, which has been effectively fixed at 3.375% by an interest rate swap through February 19, 2010. The interest rate is effectively
fixed at 2.525% through a forward interest rate swap from February 20, 2010 through November 1, 2011 See note 5 to the consolidated financial statements for further discussion.
Variable interest rates based on LIBor in effect on our borrowings outstanding at December 31, 2009.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appearing on pages 64 to 95 are
incorporated herein by reference.
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer, Chief Financial Officer and Executive
Vice President of Accounting, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
We carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer, Chief Financial Officer and Executive
Vice President of Accounting, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2009. Based on the foregoing,
our Chief Executive Officer, Chief Financial Officer and Executive Vice President of
Accounting concluded that our disclosure controls and procedures were effective at a
reasonable assurance level.
Internal Control over Financial Reporting
See the Report of Management in Item 8 of this Form 10-K.
See the Reports of Independent Registered Public Accounting Firm in Item 8 of this
Form 10-K.
During the three months ended December 31, 2009, there was no change in our
internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Form 10-k Washington Real Estate Investment Trust
57
Part III
Certain information required by Part III is omitted from this Form 10-K in that we
will file a definitive proxy statement pursuant to Regulation 14A with respect to our
2010 Annual Meeting (the “Proxy Statement”) no later than 120 days after the end of
the fiscal year covered by this Form 10-K, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference. In addition,
we have adopted a code of ethics which can be reviewed and printed from our website
www.writ.com.
Item 10. Directors and Executive Officers and
Corporate Governance
The information required by this Item is hereby incorporated herein by reference to
the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is hereby incorporated herein by reference to
the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters
The information required under this Item by Item 403 of Regulation S-K is hereby
incorporated herein by reference to the Proxy Statement.
Equity Compensation Plan Information1
Number of Securities
to be Issued
upon Exercise of
Weighted-Average
Exercise Price of
Outstanding Options, Outstanding Options,
Warrants and Rights Warrants and Rights
(a)
(b)
Number of
Securities Remaining
Available for Future
Issuance under
Equity Compensation
Plans (excluding
securities reflected
in column (a))
(c)
282,289
$25.03
1,685,354
32,0002
314,289
$28.52
$25.39
—
1,685,354
Plan Category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved
by security holders
Total
1 We previously maintained a Share Grant Plan for officers, trustees and non-officer employees, which expired on
December 15, 2007. 322,325 shares and 27,675 restricted share units had been granted under this plan. We
previously maintained a stock option plan for trustees which provided for the annual granting of 2,000 non-qualified
stock options to trustees the last of which were granted in 2004. The plan expired on December 15, 2007, and
84,000 options had been granted. See note 7 to the consolidated financial statements for further discussion.
These securities are options issued under a Share Grant Plan for officers, trustees and non-officer employees. This plan
expired on December 15, 2007 and options may no longer be issued thereafter.
2
Item 13. Certain Relationships and Related
Transactions, and Director Independence
The information required by this Item is hereby incorporated herein by reference to
the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this Item is hereby incorporated herein by reference to
the Proxy Statement.
58
Annual Report 2009
Form 10-k
Part IV
Item 15. Exhibits and Financial Statement Schedules
(A). The following documents are filed as part of this Form 10-K:
1. Financial Statements
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Income for the Years Ended
December 31, 2009, 2008 and 2007
Consolidated Statements of Changes in Shareholders’ Equity
for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Page
61
62
63
64
65
66
67
68
2. Financial Statement Schedules
Schedule III—Consolidated Real Estate and Accumulated Depreciation
92
3. Exhibits:
3.1 Declaration of Trust.
3.2
3.3
3.4
Amendment to Declaration of Trust dated September 21, 1998.
Articles of Amendment to Declaration of Trust dated June 24, 1999.
Articles of Amendment to Declaration of Trust dated June 1, 2006
3.5 Amended and Restated Bylaws dated October 22, 2009
4.1
Indenture dated as of August 1, 1996 between WRIT and The First National
Bank of Chicago
4.2
Form of 2028 Notes
4.7
4.8
Form of 5.05% Senior Notes due May 1, 2012
Form of 5.35% Senior Notes due May 1, 2015 dated April 26, 2005
4.9 Officers Certificate establishing the terms of the 2012 and 2015 Notes,
dated April 20, 2005
4.10
Form of 5.35% Senior Notes due May 1, 2015 dated October 6, 2005
4.11 Officers Certificate establishing the terms of the 2015 Notes, dated
October 3, 2005
4.12
Form of 5.95% Senior Notes due June 15, 2011
4.13 Officers’ Certificate establishing the terms of the 2011 Notes, dated
June 6, 2006
4.14
Form of 3.875% Senior Convertible Notes due September 15, 2026
4.15 Officers’ Certification establishing the terms of the Convertible Notes,
dated September 11, 2006
4.16
Form of additional 3.875% Senior Convertible Notes due September 15, 2026
4.17
Form of 5.95% senior notes due June 15, 2011, dated July 21, 2006
4.18 Officers’ Certification establishing the terms of the 2011 Notes, dated
July 21, 2006
4.19 Credit agreement dated November 2, 2006 between Washington Real
Estate Investment Trust as borrower and a syndicate of banks as lender
with The Bank of New York as documentation agent, The Royal Bank of
Scotland, plc as syndication agent and Wells Fargo Bank, NA, as agent
4.20 Form of 3.875% Convertible Senior Notes due September 15, 2026
4.21 Officers’ Certificate establishing the terms of the 3.85% Convertible Senior
Notes due September 15, 2026
4.22
Form of additional 3.85% Convertible Senior Notes due September 15, 2026
4.23 Supplemental Indenture by and between WRIT and the Bank of New York
Trust Company, N.A. dated as of July 3, 2007
4.24 Credit agreement dated June 29, 2007 by and among WRIT, as borrower, the
financial institutions party thereto as lenders, and SunTrust Bank as agent
4.25 Term Loan Agreement dated as of February 21, 2008, by and between
WRIT and Wells Fargo Bank, National Association
4.26 Multifamily Note Agreement (Walker House Apartments) dated as of May 29,
4.3 Officer’s Certificate Establishing Terms of the 2013 Notes, dated
2008, by and between WRIT and Wells Fargo Bank, National Association
March 12, 2003
4.4
Form of 2013 Notes
4.27 Multifamily Note Agreement (3801 Connecticut Avenue) dated as of May 29,
2008, by and between WRIT and Wells Fargo Bank, National Association
4.5 Officers’ Certificate Establishing Terms of the 2014 Notes, dated
4.28 Multifamily Note Agreement (Bethesda Hill Apartments) dated as of May 29,
December 8, 2003
4.6
Form of 2014 Notes
2008, by and between WRIT and Wells Fargo Bank, National Association
Form 10-k Washington Real Estate Investment Trust
59
4.29 First Amendment to Term Loan Agreement dated as of May 7, 2009, by
10.22* Supplemental Executive Retirement Plan II dated May 23, 2007
and between WRIT and Wells Fargo Bank, National Association
10.23* Amended Long Term Incentive Plan, effective January 1, 2008
10.1 Purchase and Sale Agreement dated as of June 16, 2008, for 2445 M Street,
10.24* Transition Agreement and General Release dated August 5, 2008 with Sara
NW, Washington, DC
10.2* 1991 Incentive Stock Option Plan, as amended
10.3* Deferred Compensation Plan for Executives dated January 1, 2000
10.4* Split-Dollar Agreement dated April 1, 2000
L. Grootwassink
10.25* Change in control Agreement dated November 11, 2008 with William T. Camp
10.26* Change in control Agreement dated October 7, 2008 with Thomas C. Morey
10.27* Form of Indemnification Agreement by and between WRIT and the indemnitee
10.5* 2001 Stock Option Plan
10.6* Share Purchase Plan
10.7* Supplemental Executive Retirement Plan
10.8* Description of WRIT Short-term and Long-term Incentive Plan
10.9* Description of WRIT Revised Trustee Compensation Plan
10.10* Supplemental Executive Retirement Plan
10.28* Short Term Incentive Plan, effective January 1, 2009
10.29* Long Term Incentive Plan, effective July 1, 2009
12
21
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of Registrant
23.1 Consent of Independent Registered Public Accounting Firm
24
Power of Attorney
10.11* Change in control Agreement dated May 22, 2003 with Thomas L. Regnell
31.a Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of
10.12* Change in control Agreement dated June 13, 2005 with David A. DiNardo
the Securities Exchange Act of 1934, as amended (“the Exchange Act”)
10.13* Change in control Agreement dated May 22, 2003 with Laura M. Franklin
31.b Certification of
the Executive Vice President—Accounting and
10.14* Change in control Agreement dated January 1, 2006 with James B. Cederdahl
Administration pursuant to Rule 13a-14(a) of the Exchange Act
10.15* Long Term Incentive Plan, effective January 1, 2006
10.16* Short Term Incentive Plan, effective January 1, 2006
10.17* 2007 Omnibus Long Term Incentive Plan
10.18* Change in control Agreement dated June 1, 2007 with George F. McKenzie
10.19* Change in control Agreement dated May 14, 2007 with Michael S. Paukstitus
10.20* Deferred Compensation Plan for Directors dated December 1, 2000
10.21* Deferred Compensation for Officers dated January 1, 2007
31.c Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Exchange Act
32
Certification of the Chief Executive Officer, Executive Vice President—
Accounting and Administration and Chief Financial Officer pursuant to
Rule 13a-14(b) of the Exchange Act and 18U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Management contracts or compensation plans or arrangements in which trustees or executive officers are eligible
to participate.
60
Annual Report 2009
Form 10-k
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 12, 2010
By: /s/ George F. McKenzie
Washington Real Estate Investment Trust
George F. McKenzie
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
/s/ Edmund B. Cronin, Jr.*
Edmund B. Cronin, Jr.
/s/ George F. McKenzie
George F. McKenzie
/s/ John M. Derrick, Jr.*
John M. Derrick, Jr.
/s/ John P. McDaniel*
John P. McDaniel
/s/ Charles T. Nason*
Charles T. Nason
/s/ Edward S. Civera*
Edward S. Civera
/s/ Thomas Edgie Russell, III*
Thomas Edgie Russell, III
/s/ Terence C. Golden*
Terence C. Golden
/s/ Wendelin A. White*
Wendelin A. White
/s/ Laura M. Franklin
Laura M. Franklin
/s/ William T. Camp
William T. Camp
* By: /s/ Laura M Franklin
Laura M Franklin
Title
Chairman, Trustee
Date
March 12, 2010
President, Chief Executive Officer
and Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Executive Vice President Accounting,
Administration and Corporate Secretary
Executive Vice President and
Chief Financial Officer
through power of attorney
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
Management’s Report on Internal Control
over Financial Reporting
Management of Washington Real Estate Investment Trust (the “Trust”) is responsible
for establishing and maintaining adequate internal control over financial reporting and
for the assessment of the effectiveness of internal controls over financial reporting. The
Trust’s internal control system over financial reporting is a process designed under the
supervision of the Trust’s principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of the consolidated financial statements in accordance with U.S. generally accepted
accounting principles.
All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions.
In connection with the preparation of the Trust’s annual consolidated financial
statements, management has undertaken an assessment of the effectiveness of the
Trust’s internal control over financial reporting as of December 31, 2009, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
Framework). Management’s assessment included an evaluation of the design of
the Trust’s internal control over financial reporting and testing of the operational
effectiveness of those controls.
Based on this assessment, management has concluded that as of December 31, 2009,
the Trust’s internal control over financial reporting was effective at a reasonable
assurance level regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted
accounting principles.
Ernst & Young LLP, the independent registered public accounting firm that audited
the Trust’s consolidated financial statements included in this report, have issued an
unqualified opinion on the effectiveness of the Trust’s internal control over financial
reporting, a copy of which appears on the next page of this annual report.
Form 10-k Washington Real Estate Investment Trust
61
Report of Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting
The Board of Trustees and Shareholders of
Washington Real Estate Investment Trust
We have audited Washington Real Estate Investment Trust and Subsidiaries’ internal
control over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Washington Real
Estate Investment Trust’s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, Washington Real Estate Investment Trust and Subsidiaries maintained,
in all material respects, effective internal control over financial reporting as of
December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Washington Real Estate Investment Trust and Subsidiaries as of December 31, 2009
and 2008 and the related consolidated statements of income, shareholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2009
of Washington Real Estate Investment Trust and Subsidiaries and our report dated
February 26, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 26, 2010
62
Annual Report 2009
Form 10-k
Report of Independent Registered
Public Accounting Firm
The Board of Trustees and Shareholders of
Washington Real Estate Investment Trust
We have audited the accompanying consolidated balance sheets of Washington Real
Estate Investment Trust and Subsidiaries as of December 31, 2009 and 2008, and
the related consolidated statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2009. Our audits also
included the financial statement schedule listed in the Index at Item 15(A). These
financial statements and schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 present fairly, in all material
respects, the consolidated financial position of Washington Real Estate Investment
Trust and Subsidiaries at December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Washington Real Estate Investment Trust
and Subsidiaries’ internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 26, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 26, 2010
Form 10-k Washington Real Estate Investment Trust
63
Consolidated Balance Sheets
as of December 31, 2009 and 2008
(in thousands, except per share data)
Assets
Land
Income producing property
Accumulated depreciation and amortization
Net income producing property
Development in progress
Total real estate held for investment, net
Investment in real estate sold or held for sale, net
Cash and cash equivalents
Restricted cash
Rents and other receivables, net of allowance for doubtful accounts of $6,455 and $6,122, respectively
Prepaid expenses and other assets
Other assets related to properties sold or held for sale
Total assets
Liabilities
Notes payable
Mortgage notes payable
Lines of credit
Accounts payable and other liabilities
Advance rents
Tenant security deposits
Other liabilities related to properties sold or held for sale
Total liabilities
Equity
Shareholders’ equity
Shares of beneficial interest; $0.01 par value; 100,000 shares authorized: 59,811 and 52,434 shares issued and outstanding, respectively
Additional paid in capital
Distributions in excess of net income
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Noncontrolling interests in subsidiaries
Total equity
Total liabilities and shareholders’ equity
As adjusted (see Current report on Form 8-K filed July 10, 2009 and note 3 to the consolidated financial statements)
1
See accompanying notes to the financial statements.
64
Annual Report 2009
Form 10-k
2009
$ 412,137
1,899,378
2,311,515
(474,171)
1,837,344
25,031
1,862,375
3,841
11,203
19,170
50,525
97,815
296
$2,045,225
$ 688,912
405,451
128,000
52,649
11,211
9,854
85
1,296,162
599
944,825
(198,412)
(1,757)
745,255
3,808
749,063
$2,045,225
20081
$ 410,833
1,854,008
2,264,841
(394,902)
1,869,939
23,732
1,893,671
26,734
11,874
18,823
44,675
112,284
1,346
$2,109,407
$ 890,679
421,286
67,000
70,538
8,926
10,084
469
1,468,982
526
777,375
(138,936)
(2,335)
636,630
3,795
640,425
$2,109,407
Consolidated Statements of Income
for the Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share data)
Revenue
Real estate rental revenue
Expenses
Utilities
Real estate taxes
Repairs and maintenance
Property administration
Property management
Operating services and common area maintenance
Other real estate expenses
Depreciation and amortization
General and administrative
Real estate operating income
Other income (expense)
Interest expense
Other income
Gain (loss) on extinguishment of debt, net
Gain from non-disposal activities
Income from continuing operations
Discontinued operations:
Income from operations of properties sold or held for sale
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests in subsidiaries
Net income attributable to the controlling interests
Basic net income attributable to the controlling interests per share
Continuing operations
Discontinued operations, including gain on sale of real estate
Net income attributable to the controlling interests per share
Diluted net income attributable to the controlling interests per share
Continuing operations
Discontinued operations, including gain on sale of real estate
Net income attributable to the controlling interests per share
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
Dividends declared and paid per share
See accompanying notes to the financial statements.
2009
$306,929
21,484
32,734
12,064
9,807
7,628
16,581
4,275
94,042
13,906
212,521
94,408
(75,001)
1,205
5,336
73
(68,387)
26,021
1,579
13,348
40,948
(203)
$ 40,745
$
$
$
$
$
0.45
0.26
0.71
0.45
0.26
0.71
56,894
56,968
1.73
2008
$278,691
19,288
27,950
11,003
9,855
7,830
14,151
3,422
85,659
12,110
191,268
87,423
(75,041)
1,073
(5,583)
17
(79,534)
7,889
4,129
15,275
27,293
(211)
$ 27,082
$
$
$
$
$
0.15
0.40
0.55
0.15
0.40
0.55
49,138
49,217
1.72
2007
$248,899
16,383
21,691
9,147
7,060
7,045
13,057
2,976
68,364
14,882
160,605
88,294
(66,336)
1,875
—
1,303
(63,158)
25,136
7,510
25,022
57,668
(217)
$ 57,451
$
$
$
$
$
0.54
0.71
1.25
0.53
0.71
1.24
45,911
46,049
1.68
Form 10-k Washington Real Estate Investment Trust
65
Consolidated Statements of Shareholders’ Equity
for the Years Ended December 31, 2009, 2008 and 2007
(in thousands)
Balance, December 31, 2006
Net income attributable to the controlling interests
Net income attributable to noncontrolling interests
Distributions to noncontrolling interests
Issuance of units to noncontrolling interest holder
Dividends
Equity offering, net of issuance costs
Equity component of convertible notes, net of issuance costs
Share options exercised
Share grants, net of share grant amortization and forfeitures
Balance, December 31, 2007
Comprehensive income:
Net income attributable to the controlling interests
Net income attributable to noncontrolling interests
Change in fair value of interest rate hedge
Total comprehensive income
Distributions to noncontrolling interests
Dividends
Equity offerings, net of issuance costs
Shares issued under Dividend Reinvestment Program
Share options exercised
Share grants, net of share grant amortization and forfeitures
Balance, December 31, 2008
Comprehensive income:
Net income attributable to the controlling interests
Net income attributable to noncontrolling interests
Change in fair value of interest rate hedge
Total comprehensive income
Distributions to noncontrolling interests
Dividends
Equity offerings, net of issuance costs
Shares issued under Dividend Reinvestment Program
Share options exercised
Share grants, net of share grant amortization and forfeitures
Balance, December 31, 2009
See accompanying notes to the financial statements.
66
Annual Report 2009
Form 10-k
Shares
45,042
—
—
—
—
—
1,600
—
13
27
46,682
—
—
—
—
—
—
5,466
125
120
41
—
—
—
—
—
—
55
1
1
1
52,434
526
—
—
—
—
—
—
7,240
88
3
46
59,811
—
—
—
—
—
—
72
1
—
—
$599
Shares of
Beneficial
Interest at
Par Value
$451
—
—
—
—
—
16
—
—
1
Additional
Paid in
Capital
$509,326
—
—
—
—
—
57,745
12,435
313
2,707
Distributions
in Excess of
Net Income
Attributable
to the
Total
Accumulated
Other
Controlling Comprehensive Shareholders’
Income
—
$
—
—
—
—
—
—
—
—
—
Interests
$ (59,855)
57,451
—
—
—
(78,050)
—
—
—
—
Equity
$ 449,922
57,451
—
—
—
(78,050)
57,761
12,435
313
2,708
Noncontrolling
Interests in
Subsidiaries
$1,739
—
217
(156)
1,976
—
—
—
—
—
Total
Equity
$ 451,661
57,451
217
(156)
1,976
(78,050)
57,761
12,435
313
2,708
468
582,526
(80,454)
—
502,540
3,776
506,316
—
—
—
—
—
—
184,878
4,102
2,642
3,227
777,375
—
—
—
—
—
—
160,843
2,478
45
4,084
$944,825
27,082
—
—
—
—
(85,564)
—
—
—
—
(138,936)
40,745
—
—
—
—
(100,221)
—
—
—
—
$(198,412)
—
—
(2,335)
—
—
—
—
—
—
—
(2,335)
—
—
578
—
—
—
—
—
—
—
$(1,757)
27,082
—
(2,335)
24,747
—
(85,564)
184,933
4,103
2,643
3,228
636,630
40,745
—
578
41,323
—
(100,221)
160,915
2,479
45
4,084
$ 745,255
—
211
—
211
(192)
—
—
—
—
—
3,795
—
203
—
203
(190)
—
—
—
—
—
$3,808
27,082
211
(2,335)
24,958
(192)
(85,564)
184,933
4,103
2,643
3,228
640,425
40,745
203
578
41,526
(190)
(100,221)
160,915
2,479
45
4,084
$ 749,063
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2009, 2008 and 2007
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain on sale of real estate
Depreciation and amortization, including amounts in discontinued operations
Provision for losses on accounts receivable
Amortization of share grants, net
Amortization of debt premiums, discounts and related financing costs
Loss (gain) on extinguishment of debt, net
Changes in operating other assets
Changes in operating other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Real estate acquisitions, net1
Capital improvements to real estate
Development in progress
Net cash received for sale of real estate
Non-real estate capital improvements
Net cash used in investing activities
Cash flows from financing activities
Line of credit borrowings
Line of credit repayments
Dividends paid
Distributions to noncontrolling interests
Proceeds from equity offerings under dividend reinvestment program
Proceeds from mortgage notes payable
Principal payments—mortgage notes payable
Proceeds from debt offering
Financing costs
Net proceeds from equity offerings
Notes payable repayments, including penalties for early extinguishment
Net proceeds from exercise of share options
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized
2009
2008
2007
$ 40,948
$ 27,293
$ 57,668
(13,348)
94,447
6,889
3,085
6,957
(5,336)
(14,576)
(16,165)
102,901
(19,828)
(27,337)
(2,135)
36,842
(351)
(12,809)
214,500
(153,500)
(100,221)
(190)
2,479
37,500
(54,030)
—
(847)
160,915
(197,414)
45
(90,763)
(671)
11,874
$ 11,203
$ 69,292
(15,275)
86,898
4,346
3,228
7,669
5,583
(13,648)
(8,979)
97,115
(168,230)
(37,272)
(15,509)
40,231
(642)
(181,422)
165,000
(290,500)
(85,564)
(192)
4,103
81,029
(3,488)
100,000
(1,924)
184,933
(81,344)
2,643
74,696
(9,611)
21,485
$ 11,874
$ 68,616
(25,022)
71,024
2,011
2,707
7,042
—
(14,319)
15,366
116,477
(294,166)
(41,122)
(66,996)
56,344
(3,200)
(349,140)
258,200
(126,700)
(78,050)
(156)
—
—
(10,797)
150,000
(5,144)
57,761
—
313
245,427
12,764
8,721
$ 21,485
$ 57,499
See note 3 to the consolidated financial statements for the supplemental discussion of non-cash investing and financing activities, including the assumption of mortgage debt in conjunction with some of our real estate acquisitions.
1
See accompanying notes to the financial statements.
Form 10-k Washington Real Estate Investment Trust
67
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2009, 2008 and 2007
The following is a breakdown of the taxable percentage of our dividends for 2009, 2008
and 2007, respectively (unaudited):
1. Nature of Business
Washington Real Estate Investment Trust (“We” or “WRIT”), a Maryland real estate
investment trust, is a self-administered, self-managed equity real estate investment
trust, successor to a trust organized in 1960. Our business consists of the ownership and
development of income-producing real estate properties in the greater Washington
Metro region. We own a diversified portfolio of office buildings, medical office buildings,
industrial/flex centers, multifamily buildings and retail centers.
2009
2008
2007
Ordinary
Income
75%
60%
90%
Return of
Capital
17%
18%
10%
2. Accounting Policies
Unrecaptured
Section 1250
Gain
7%
6%
0%
Capital
Gain
1%
16%
0%
Federal Income Taxes
We believe that we qualify as a real estate investment trust (“REIT”) under Sections
856-860 of the Internal Revenue Code and intend to continue to qualify as such.
To maintain our status as a REIT, we are required to distribute 90% of our ordinary
taxable income to our shareholders. When selling properties, we have the option
of (a) reinvesting the sale price of properties sold, allowing for a deferral of income
taxes on the sale, (b) paying out capital gains to the shareholders with no tax to
WRIT or (c) treating the capital gains as having been distributed to the shareholders,
paying the tax on the gain deemed distributed and allocating the tax paid as a credit
to the shareholders. In May 2009, we sold a multifamily property, Avondale, for a
gain of $6.7 million. In July 2009, we sold an industrial property, Tech 100 Industrial
Park, and an office property, Brandywine Center, for gains of $4.1 million and
$1.0 million, respectively. In November 2009, we sold an industrial property, Crossroads
Distribution Center, for a gain of $1.5 million. In June 2008, we sold two industrial
properties, Sullyfield Center and The Earhart Building, for a gain of $15.3 million. The
gains from the sales were paid out to the shareholders.
Generally, no provisions for income taxes are necessary except for taxes on
undistributed REIT taxable income and taxes on the income generated by our taxable
REIT subsidiaries (“TRS”). A TRS is subject to corporate federal and state income tax
on its taxable income at regular statutory rates. Certain of our taxable REIT subsidiaries
have net operating loss carryforwards available of approximately $5.3 million. These
carryforwards begin to expire in 2028. We have considered estimated future taxable
income and have determined that a full valuation allowance for our net deferred tax
assets is appropriate. There were no income tax provisions or material deferred income
tax items for our TRS for the years ended December 31, 2009, 2008 and 2007.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of WRIT and
its majority owned subsidiaries, after eliminating all intercompany transactions.
New Accounting Pronouncements
In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principals, a replacement
of FASB Statement No. 162 (FASB Accounting Standards Codification section 105-10-
65). This statement establishes the Codification as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. The Codification
is the culmination of a project to organize and simplify authoritative GAAP literature
by reorganizing the various and dispersed GAAP pronouncements within a consistent
structure. This statement is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The issuance of this statement and the
Codification does not change GAAP and does not have any impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FASB
Accounting Standards Codification section 805-10-65), a revision of SFAS No. 141.
This statement changes the accounting for acquisitions by specifically eliminating the
step acquisition model, changing the recognition of contingent consideration from
being recognized when it was probable to being recognized at the time of acquisition,
disallowing the capitalization of pre-acquisition and transaction costs, and delaying
when restructuring related to acquisitions can be recognized. Our adoption of the
standard for the fiscal year beginning January 1, 2009 resulted in a $0.8 million increase
in general and administrative expense, as previously capitalized pre-acquisition costs
were expensed as a period cost.
68
Annual Report 2009
Form 10-k
In March 2008 the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No. 133 (FASB Accounting
Standards Codification section 815-10-65). This statement requires entities to provide
greater transparency about how and why an entity uses derivative instruments,
and how derivative instruments and related hedged items affect an entity’s financial
position, results of operations, and cash flows. To meet these objectives, this statement
requires (a) qualitative disclosures about objectives for using derivatives by primary
underlying risk exposure and by purpose or strategy, (b) information about the volume
of derivative activity, (c) tabular disclosures about balance sheet location and gross fair
value amounts of derivative instruments, income statement and other comprehensive
income location and amounts of gains and losses on derivative instruments by type of
contract, and (d) disclosures about credit risk-related contingent features in derivative
agreements. We adopted this statement effective for the fiscal year beginning January 1,
2009. This statement required us to provide expanded disclosures of our interest rate
hedge contract and to present certain disclosures in tabular format (See note 2 to the
consolidated financial statements).
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements
(FASB Accounting Standards Codification section 820-10-65). This statement defines
fair value, establishes a framework for measuring fair value in accordance with GAAP,
and expands disclosures about fair value measurements. On February 12, 2007, the
FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157 (FASB Accounting Standards Codification section 820-10-65), which amends FASB
Statement No. 157 to delay the effective date for all non-financial assets and non-
financial liabilities, except for those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (i.e. at least annually) to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years. We do not have
significant assets or liabilities recorded at fair value on a recurring basis, and therefore
the adoption of this statement for non-financial assets and non-financial liabilities on
January 1, 2009 did not have a material impact on our financial statements. However,
starting in 2009 we apply FASB Statement No. 157 as a part of our fair value allocation
to any properties acquired.
In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (FASB
Accounting Standards Codification section 855-10-65). This statement requires
disclosure of the date through which subsequent events have been evaluated, as well
as whether that date is the date the financial statements were issued. We adopted this
statement effective for the quarter ending June 30, 2009. The required disclosure is in
note 16 to the consolidated financial statements.
Revenue Recognition
We lease multifamily properties under operating leases with terms of generally one year
or less. We lease commercial properties (our office, medical office, retail and industrial
segments) under operating leases with average terms of three to seven years. We
recognize rental income and rental abatements from our multifamily and commercial
leases when earned on a straight-line basis over the lease term. Recognition of rental
income commences when control of the facility has been given to the tenant. We
record a provision for losses on accounts receivable equal to the estimated uncollectible
amounts. We base this estimate on our historical experience and a review of the current
status of our receivables. We recognize percentage rents, which represent additional
rents based on gross tenant sales, when tenants’ sales exceed specified thresholds.
We recognize sales of real estate at closing only when sufficient down payments have
been obtained, possession and other attributes of ownership have been transferred to
the buyer and we have no significant continuing involvement.
We recognize 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.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily represents amounts accrued and unpaid from tenants in
accordance with the terms of the respective leases, subject to our revenue recognition
policy. We review receivables monthly and establish reserves when, in the opinion of
management, collection of the receivable is doubtful. We establish reserves for tenants
whose rent payment history or financial condition casts doubt upon the tenants’
ability to perform under their lease obligations. When we deem the collection of a
receivable to be doubtful in the same quarter that we established the receivable, then
we recognize the allowance for that receivable as an offset to real estate revenues.
When we deem a receivable that was initially established in a prior quarter to be
doubtful, then we recognize the allowance as an operating expense. In addition to rents
due currently, accounts receivable include amounts representing minimal rental income
accrued on a straight-line basis to be paid by tenants over the remaining term of their
respective leases.
We include notes receivable balances of $8.5 million and $8.6 million as of December 31,
2009 and 2008, respectively, in our accounts receivable balances.
Noncontrolling Interests in Subsidiaries
We entered into an operating partnership agreement with a member of the entity that
previously owned Northern Virginia Industrial Park in conjunction with the acquisition
of this property in May 1998. This resulted in a noncontrolling ownership interest in
this property based upon defined company ownership units at the date of purchase.
The operating partnership agreement was amended and restated in 2002 resulting in
a reduced noncontrolling ownership percentage interest. We account for this activity
Form 10-k Washington Real Estate Investment Trust
69
by applying the noncontrolling owner’s percentage ownership interest to the net
income of the property and reporting such amount in our net income attributable to
noncontrolling interests.
In August 2007 we acquired a 0.8 acre parcel of land located at 4661 Kenmore Avenue,
Alexandria, Virginia for future medical office development. The acquisition was
funded by issuing operating partnership units in our operating partnership, which is a
consolidated subsidiary of WRIT. This resulted in a noncontrolling ownership interest
in this property based upon defined company operating partnership units at the date
of purchase.
Net income attributable to noncontrolling interests was $202,700, $211,000 and
$216,900 for the years ended December 31, 2009, 2008 and 2007, respectively. None
of the income from noncontrolling interests is attributable to discontinued operations
or accumulated other comprehensive income. Quarterly distributions are made to the
noncontrolling owners equal to the quarterly dividend per share for each operating
partnership unit.
Income attributable to the controlling interests from continuing operations was
$25.8 million, $7.7 million and $24.9 million for the years ended December 31, 2009,
2008 and 2007, respectively.
The operating partnership units could have a dilutive impact on our earnings per share
calculation. They are not dilutive for the years ended December 31, 2009, 2008 and
2007, and are not included in our earnings per share calculations.
Deferred Financing Costs
External costs associated with the issuance or assumption of mortgages, notes payable
and fees associated with the lines of credit are capitalized and amortized using the
effective interest rate method or the straight-line method which approximates the
effective interest rate method over the term of the related debt. As of December 31,
2009 and 2008 deferred financing costs of $18.1 million and $21.3 million, respectively,
net of accumulated amortization of $10.3 million and $9.0 million, were included in
prepaid expenses and other assets on the balance sheets. The amortization is included
in interest expense in the accompanying statements of income. The amortization of
debt costs included in interest expense totaled $3.1 million, $3.6 million and $3.5 million
for the years ended December 31, 2009, 2008 and 2007, respectively.
Deferred Leasing Costs
We capitalize and amortize costs associated with the successful negotiation of leases,
both external commissions and internal direct costs, on a straight-line basis over the
terms of the respective leases. If an applicable lease terminates prior to the expiration
of its initial lease term, we write off the carrying amount of the costs to amortization
expense. As of December 31, 2009 and 2008, we included deferred leasing costs
of $33.1 million and $31.0 million, respectively, net of accumulated amortization of
$11.7 million and $10.2 million, in prepaid expenses and other assets on the balance
sheets. The amortization of deferred leasing costs included in amortization expense
for properties classified as continuing operations totaled $4.8 million, $3.6 million and
$2.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
We capitalize and amortize against revenue leasing incentives associated with the
successful negotiation of leases on a straight-line basis over the terms of the respective
leases. If an applicable lease terminates prior to the expiration of its initial lease term,
we write off the carrying amount of the costs as a reduction of revenue. As of
December 31, 2009 and 2008, we included deferred leasing incentives of $12.2 million
and $11.8 million, respectively, net of accumulated amortization of $1.6 million and
$0.5 million, in prepaid expenses and other assets on the balance sheets. The
amortization of deferred leasing incentives included as a reduction of revenue for
properties classified as continuing operations totaled $1.2 million, $0.4 million and
$0.1 million, for the years ended December 31, 2009, 2008 and 2007, respectively.
Real Estate and Depreciation
We depreciate buildings on a straight-line basis over estimated useful lives ranging from
28 to 50 years. We capitalize all capital improvement expenditures associated with
replacements, improvements or major repairs to real property that extend its useful
life and depreciate them using the straight-line method over their estimated useful lives
ranging from 3 to 30 years. We also capitalize costs incurred in connection with our
development projects, including capitalizing interest and other internal costs during
periods in which qualifying expenditures have been made and activities necessary to
get the development projects ready for their intended use are in progress. In addition,
we capitalize tenant leasehold improvements when certain criteria are met, including
when we supervise construction and will own the improvements. We depreciate all
tenant improvements over the shorter of the useful life of the improvements or the
term of the related tenant lease. Real estate depreciation expense from continuing
operations for the years ended December 31, 2009, 2008 and 2007 was $75.8 million,
$68.5 million and $55.0 million, respectively. We charge maintenance and repair costs
that do not extend an asset’s life to expense as incurred.
We capitalize interest costs incurred on borrowing obligations while qualifying assets
are being readied for their intended use. Total interest expense capitalized to real
estate assets related to development and major renovation activities was $1.4 million,
$2.3 million and $6.7 million for the years ended December 31, 2009, 2008 and
2007, respectively. We amortize capitalized interest over the useful life of the related
underlying assets upon those assets being placed into service.
We recognize impairment losses on long-lived assets used in operations and held for
sale, development assets or land held for future development, if indicators of impairment
70
Annual Report 2009
Form 10-k
are present and the net undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount and estimated undiscounted cash
flows associated with future development expenditures. If such carrying amount is in
excess of the estimated cash flows from the operation and disposal of the property,
we would recognize an impairment loss equivalent to an amount required to adjust
the carrying amount to the estimated fair value. The estimated fair value would be
calculated in accordance with current GAAP fair value provisions. During 2009 and
2008, we expensed $0.1 million and $0.6 million, respectively, included in general
and administrative expenses, related to development projects no longer considered
probable. There were no property impairments recognized during the year ended
December 31, 2007.
We record real estate acquisitions as business combinations in accordance with GAAP.
We record acquired or assumed assets, including physical assets and in-place leases,
and liabilities, based on their fair values. We record goodwill when the purchase
price exceeds the fair value of the assets and liabilities acquired. We determine the
estimated fair values of the assets and liabilities in accordance with current GAAP fair
value provisions. We determine the fair values of acquired buildings on an “as-if-vacant”
basis considering a variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated future cash flows and
valuation assumptions consistent with current market conditions. We allocate the
“as-if-vacant” fair value to land, building and tenant improvements based on property
tax assessments and other relevant information obtained in connection with the
acquisition of the property.
The fair value of in-place leases consists of the following components—(a) the
estimated cost to us to replace the leases, including foregone rents during the period
of finding a new tenant and foregone recovery of tenant pass-throughs (referred to as
“absorption cost”); (b) the estimated cost of tenant improvements, and other direct
costs associated with obtaining a new tenant (referred to as “tenant origination cost”);
(c) estimated leasing commissions associated with obtaining a new tenant (referred
to as “leasing commissions”); (d) the above/at/below market cash flow of the leases,
determined by comparing the projected cash flows of the leases in place to projected
cash flows of comparable market-rate leases (referred to as “net lease intangible”); and
(e) the value, if any, of customer relationships, determined based on our evaluation of
the specific characteristics of each tenant’s lease and our overall relationship with the
tenant (referred to as “customer relationship value”). We have attributed no value to
customer relationship value as of December 31, 2009 and 2008.
We discount the amounts used to calculate net lease intangibles using an interest rate
which reflects the risks associated with the leases acquired. We include tenant origination
costs in income producing property on our balance sheet and amortize the tenant
origination costs as depreciation expense on a straight-line basis over the remaining
life of the underlying leases. We classify leasing commissions and absorption costs as
other assets and amortize leasing commissions and absorption costs as amortization
expense on a straight-line basis over the remaining life of the underlying leases. We
classify net lease intangible assets as other assets and amortize net lease intangible assets
on a straight-line basis as a decrease to real estate rental revenue over the remaining
term of the underlying leases. We classify net lease intangible liabilities as other liabilities
and amortize net lease intangible liabilities on a straight-line basis as an increase to real
estate rental revenue over the remaining term of the underlying leases. Should a tenant
terminate its lease, we write off the unamortized portion of the tenant origination cost,
leasing commissions, absorption costs and net lease intangible associated with that lease.
Balances, net of accumulated depreciation or amortization, as appropriate, of the
components of the fair value of in-place leases at December 31, 2009 and 2008 are as
follows (in millions):
December 31,
2009
2008
Gross
Gross
Carrying Accumulated
Carrying Accumulated
Value Amortization Net
$19.0
$20.8
$39.8
Value Amortization Net
$24.8
$40.9
$16.1
$49.6
$ 9.7
$32.2
$22.7
$ 6.4
$14.7
$26.9
$ 3.3
$17.5
$50.7
$ 9.8
$33.0
$16.3
$ 5.4
$10.3
$34.4
$ 4.4
$22.7
$12.1
$ 0.4
$11.7
$12.1
$ 0.2
$11.9
Tenant origination costs
Leasing commissions/
absorption costs
Net lease intangible assets
Net lease intangible liabilities
Below-market ground
lease intangible asset
Amortization of these components combined was $9.4 million, $11.2 million and
$9.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Amortization of these components combined over the next five years is projected
to be $7.2 million, $5.2 million, $4.0 million, $3.6 million and $3.5 million for the years
ending December 31, 2010, 2011, 2012, 2013 and 2014, respectively. No value had been
assigned to customer relationship value at December 31, 2009 or 2008.
Discontinued Operations
We classify properties as held for sale when they meet the necessary criteria, which
include: (a) senior management commits to and actively embarks upon a plan to sell
the assets, (b) the sale is expected to be completed within one year under terms usual
and customary for such sales and (c) actions required to complete the plan indicate
that it is unlikely that significant changes to the plan will be made or that the plan
will be withdrawn. Depreciation on these properties is discontinued, but operating
revenues, operating expenses and interest expense continue to be recognized until
the date of sale.
Form 10-k Washington Real Estate Investment Trust
71
Revenues and expenses of properties that are either sold or classified as held for sale
are presented as discontinued operations for all periods presented in the consolidated
statements of income. Interest on debt that can be identified as specifically attributed
to these properties is included in discontinued operations. We do not have significant
continuing involvement in the operations of any of our disposed properties.
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.
Restricted Cash
Restricted cash at December 31, 2009 and December 31, 2008 consisted of $19.2 million
and $18.8 million, respectively, in funds escrowed for tenant security deposits, real estate
tax, insurance and mortgage escrows and escrow deposits required by lenders on certain
of our properties to be used for future building renovations or tenant improvements.
Assets and Liabilities Measured at Fair Value
For assets and liabilities measured at fair value on a recurring basis, quantitative
disclosures about the fair value measurements are required to be disclosed separately
for each major category of assets and liabilities. The only assets or liabilities we had
at December 31, 2009 and 2008 that are recorded at fair value on a recurring basis
are the assets held in the Supplemental Executive Retirement Program (“SERP”) and
the interest rate hedge contracts. We base the valuations related to these items on
assumptions derived from significant other observable inputs and accordingly these
valuations fall into Level 2 in the fair value hierarchy. The fair values of these assets and
liabilities at December 31, 2009 and 2008 are as follows (in millions):
Assets:
SERP
Liabilities:
Derivatives
Fair
Value
$1.1
$1.8
December 31, 2009
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
$—
$—
Significant
Other
Observable
Inputs
(Level 2)
$1.1
$1.8
Significant
Unobservable
Inputs
(Level 3)
$—
$—
Fair
Value
$0.6
$2.3
December 31, 2008
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$—
$—
$0.6
$2.3
$—
$—
Derivative Instruments
In February 2008, we entered into an interest rate swap with a notional amount of
$100 million that qualifies as a cash flow hedge. In May 2009, we entered into a forward
interest rate swap with a notional amount of $100 million that qualifies as a cash flow
hedge (see note 6 to the consolidated financial statements for further details). We
enter into interest rate swaps to manage our exposure to variable rate interest risk.
We do not purchase derivatives for speculation. Our cash flow hedges are recorded
at fair value. We record the effective portion of changes in fair value of cash flow
hedges in other comprehensive income. We record the ineffective portion of changes
in fair value of cash flow hedges in earnings in the period affected. We assess the
effectiveness of our cash flow hedges both at inception and on an ongoing basis. We
deemed the hedges to be effective for the years ended December 31, 2009 and 2008,
as applicable.
The fair value and balance sheet locations of the interest rate swaps as of December 31,
2009 and 2008, are as follows (in millions):
Accounts payable and other liabilities
December 31, 2009 December 31, 2008
Fair Value
$1.8
Fair Value
$2.3
The interest rate swaps have been effective since inception. The gain or loss on the
effective swaps is recognized in other comprehensive income, as follows (in millions):
Change in other comprehensive income (loss)
Years Ended December 31,
2008
2009
Fair Value
Fair Value
$(2.3)
$0.5
72
Annual Report 2009
Form 10-k
Derivative instruments expose us to credit risk in the event of non-performance by the
counterparty under the terms of the interest rate hedge agreement. We believe that
we minimize our credit risk on these transactions by dealing with major, creditworthy
financial institutions. As part of our ongoing control procedures, we monitor the credit
ratings of counterparties and our exposure to any single entity, thus minimizing our
credit risk concentration.
Stock Based Compensation
We currently maintain equity based compensation plans for trustees, officers
and employees and previously also maintained option plans for trustees, officers
and employees.
We recognized compensation expense for time-based share units ratably over the
period from the service inception date through the vesting period based on the fair
market value of the shares on the date of grant. We initially measure compensation
expense for restricted performance-based share units at fair value at the grant date
as payouts are probable, and we remeasure compensation expense at subsequent
reporting dates until all of the award’s key terms and conditions are known and a
vesting has occurred. We amortize such performance-based share units to expense
over the performance period. However, we measure compensation expense for
performance-based share units with market conditions based on the grant date fair
value, as determined using a Monte Carlo simulation, and we amortize the expense
ratably over the requisite service period, regardless of whether the market conditions
are achieved and the awards ultimately vest. Compensation expense for the trustee
grants which fully vest immediately, is fully recognized upon issuance based upon the
fair market value of the shares on the date of grant.
We previously issued stock options to officers, non-officer key employees and trustees.
We last issued stock options to officers in 2002, to non-officer key employees in 2003
and to trustees in 2004. We issued all stock options prior to the adoption of SFAS No.
123(R) and accounted for the stock options in accordance with APB No. 25, whereby
if options are priced at fair market value or above at the date of grant and if other
requirements are met then the plans are considered fixed and no compensation expense
is recognized. Accordingly, we have recognized no compensation cost for stock options.
Earnings per Common Share
We determine “Basic earnings per share” using the two-class method as our unvested
restricted share awards have non-forfeitable rights to dividends, and are therefore
considered participating securities. We compute basic earnings per share by dividing
net income attributable to the controlling interest less the allocation of undistributed
earnings to unvested restricted share awards and units by the weighted-average
number of common shares outstanding for the period.
We also determine “Diluted earnings per share” under the two-class method with
respect to the unvested restricted share awards. We further evaluate any other
potentially dilutive securities at the end of the period and adjust the basic earnings
per share calculation for the impact of those securities that are dilutive. Our dilutive
earnings per share calculation includes the dilutive impact of employee stock options
based on the treasury stock method and our performance share units under the
contingently issuable method. The dilutive earnings per share calculation also considers
our operating partnership units and 3.875% convertible notes under the if-converted
method. The operating partnership units and 3.875% convertible notes were anti-
dilutive for the years ended December 31, 2009, 2008 and 2007.
Form 10-k Washington Real Estate Investment Trust
73
The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands; except per share data):
Basic earnings:
Income from continuing operations
Less: Net income attributable to noncontrolling interests
Allocation of undistributed earnings to unvested restricted share awards and units
Adjusted income from continuing operations attributable to the controlling interests
Income from discontinued operations, including gain on sale of real estate
Adjusted net income attributable to the controlling interests
Effect of dilutive securities:
Employee stock options and performance share units
Diluted earnings:
Adjusted income from continuing operations attributable to the controlling interests
Income from discontinued operations, including gain on sale of real estate
Adjusted net income attributable to the controlling interests
Basic earnings:
Income from continuing operations
Less: Net income attributable to noncontrolling interests
Allocation of undistributed earnings to unvested restricted share awards and units
Adjusted income from continuing operations attributable to the controlling interests
Income from discontinued operations, including gain on sale of real estate
Adjusted net income attributable to the controlling interests
Effect of dilutive securities:
Employee stock options and performance share units
Diluted earnings:
Adjusted income from continuing operations attributable to the controlling interests
Income from discontinued operations, including gain on sale of real estate
Adjusted net income attributable to the controlling interests
Income
(Numerator)
Year Ended December 31, 2009
Shares
(Denominator)
$26,021
(203)
(111)
25,707
14,927
40,634
—
25,707
14,927
$40,634
56,894
56,894
56,894
56,894
56,894
56,894
74
56,968
56,968
56,968
Income
(Numerator)
Year Ended December 31, 2008
Shares
(Denominator)
$ 7,889
(211)
(98)
7,580
19,404
26,984
—
7,580
19,404
$26,984
49,138
49,138
49,138
49,138
49,138
49,138
79
49,217
49,217
49,217
Per Share
Amount
$ 0.46
(0.01)
—
0.45
0.26
0.71
—
0.45
0.26
$ 0.71
Per Share
Amount
$ 0.16
(0.01)
—
0.15
0.40
0.55
—
0.15
0.40
$ 0.55
74
Annual Report 2009
Form 10-k
Basic earnings:
Income from continuing operations
Less: Net income attributable to noncontrolling interests
Allocation of undistributed earnings to unvested restricted share awards and units
Adjusted income from continuing operations attributable to the controlling interests
Income from discontinued operations, including gain on sale of real estate
Adjusted net income attributable to the controlling interests
Effect of dilutive securities:
Employee stock options and performance share units
Diluted earnings:
Adjusted income from continuing operations attributable to the controlling interests
Income from discontinued operations, including gain on sale of real estate
Adjusted net income attributable to the controlling interests
Income
(Numerator)
Year Ended December 31, 2007
Shares
(Denominator)
$25,136
(217)
(256)
24,663
32,532
57,195
—
24,663
32,532
$57,195
45,911
45,911
45,911
45,911
45,911
45,911
138
46,049
46,049
46,049
Per Share
Amount
$ 0.55
—
(0.01)
0.54
0.71
1.25
—
0.53
0.71
$ 1.24
Accounting for Uncertainty in Income Taxes
We can recognize a tax benefit only if it is “more likely than not” that a particular tax
position will be sustained upon examination or audit. To the extent that the “more
likely than not” standard has been satisfied, the benefit associated with a tax position
is measured as the largest amount that is greater than 50% likely of being recognized
upon settlement.
Other Comprehensive Income (Loss)
We recorded other comprehensive loss of $1.8 million and $2.3 million as of
December 31, 2009 and 2008, respectively, to account for the changes in valuation
of the interest rate swaps.
3. Real Estate Investments
We are subject to U.S. federal income tax as well as income tax of the states of Maryland
and Virginia, and the District of Columbia. However, as a REIT, we generally are not
subject to income tax on our net income distributed as dividends to our shareholders.
Continuing Operations
Our real estate investment portfolio, at cost, consists of properties located in Maryland,
Washington, D.C. and Virginia as follows (in thousands):
Tax returns filed for 2006 through 2009 tax years are subject to examination by taxing
authorities. We classify interest and penalties related to uncertain tax positions, if any,
in our financial statements as a component of general and administrative expense.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with GAAP requires management
to make certain estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent 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 current
year presentation.
Office
Medical office
Retail
Multifamily
Industrial/flex
December 31,
2009
$1,024,938
394,804
267,932
319,375
304,466
$2,311,515
2008
$1,011,722
367,651
266,897
316,837
301,734
$2,264,841
The amounts above reflect properties classified as continuing operations, which means
they are to be held and used in rental operations (income producing property).
We have several properties in development. In the office segment, Dulles Station,
Phase II remains in development. In the medical office segment, we have land under
Form 10-k Washington Real Estate Investment Trust
75
development at 4661 Kenmore Avenue. The cost of our real estate portfolio in
development as of December 31, 2009 and 2008 is illustrated below (in thousands):
December 31,
Office
Medical office
Retail
Multifamily
Industrial/flex
2009
$19,442
5,153
371
65
—
$25,031
2008
$18,453
4,815
239
225
—
$23,732
Our results of operations are dependent on the overall economic health of our
markets, tenants and the specific segments in which we own properties. These
segments include general purpose office, medical office, retail, multifamily and
industrial. All segments are affected by external economic factors, such as inflation,
consumer confidence, unemployment rates, etc. as well as changing tenant and
consumer requirements. Because the properties are located in the Washington
metro region, the Company is subject to a concentration of credit risk related to
these properties.
As of December 31, 2009 no single property or tenant accounted for more than 10%
of total assets or total real estate rental revenue.
Properties we acquired during the years ending December 31, 2009, 2008 and 2007 are as follows:
Acquisition Date
August 13, 2009
Total 2009
February 22, 2008
May 21, 2008
September 3, 2008
December 2, 2008
Total 2008
February 8, 2007
March 1, 2007
March 9, 2007
June 1, 2007
June 1, 2007
June 1, 2007
August 16, 2007
August 30, 2007
December 4, 2007
Total 2007
Property
Lansdowne Medical Office Building
6100 Columbia Park Road
Sterling Medical Office Building
Kenmore Apartments (374 units)
2445 M Street
270 Technology Park
Monument II
2440 M Street
Woodholme Medical Office Building
Woodholme Center
Ashburn Farm Office Park
CentreMed I & II
4661 Kenmore Avenue
2000 M Street
Type
Medical Office
Industrial/Flex
Medical Office
Multifamily
Office
Industrial/Flex
Office
Medical Office
Medical Office
Office
Medical Office
Medical Office
Land for Development
Office
Rentable
Square Feet
(unaudited)
87,000
87,000
150,000
36,000
270,000
290,000
746,000
157,000
205,000
110,000
125,000
73,000
75,000
52,000
n/a
227,000
1,024,000
Contract
Purchase Price
(in thousands)
$ 19,900
$ 19,900
$ 11,200
6,500
58,300
181,400
$257,400
$ 26,500
78,200
50,000
30,800
18,200
23,000
15,300
3,750
73,500
$319,250
As discussed in note 2 to the consolidated financial statements, we record the acquired
physical assets (land, building and tenant improvements), in-place leases (absorption, tenant
origination costs, leasing commissions, and net lease intangible assets/liabilities), and any other
liabilities at their fair values. Our sole 2009 acquisition, Lansdowne Medical Office Building,
was vacant as of the acquisition date, so we did not acquire any absorption costs, leasing
commissions, tenant origination costs or net intangible lease assets/liabilities during 2009.
76
Annual Report 2009
Form 10-k
We have allocated the total purchase price of the above acquisitions as follows
(in millions):
Land
Buildings
Tenant origination costs
Leasing commissions/absorption costs
Net lease intangible assets
Net lease intangible liabilities
Furniture, fixtures & equipment
Discount on assumed mortgage
Total1
Allocation of Purchase Price
2008
$ 80.8
140.1
10.4
18.2
1.8
(10.4)
1.0
10.1
$252.0
2009
$ 1.3
18.6
—
—
—
—
—
—
$19.9
2007
$ 43.0
258.6
11.8
17.7
0.4
(10.5)
—
—
$321.0
1
Additional settlement costs, closing costs and adjustments are included in the basis for 2008 and 2007.
A note receivable with a fair value of $7.3 million was acquired in conjunction with 2445 M Street and is recorded
separately as a note receivable in accounts receivable and other assets on the consolidated balance sheets.
The difference in total 2008 contract purchase price of properties acquired of
$257.4 million and the acquisition cost per the consolidated statements of cash flows
of $168.2 million is primarily the $101.9 million mortgage note assumed, offset by cash
escrow accounts acquired totaling $11.4 million, both related to the 2445 M Street
purchase. The remaining difference of $1.3 million is for additional settlement costs,
closing costs and non-cash adjustments on all 2008 acquisitions. The difference in
total 2007 contract purchase price of properties acquired of $319.3 million and the
acquisition cost per the consolidated statements of cash flows of $294.2 million is the
$26.8 million in mortgages assumed on the acquisitions of Woodholme Medical Office
Building, Woodholme Center and Ashburn Farm Office Park, offset by $1.7 million for
additional settlement costs, closing costs and adjustments on all acquisitions.
Discontinued Operations
We dispose of assets (sometimes using tax-deferred exchanges) that no longer meet
our long-term strategy or return objectives and where market conditions for sale are
favorable. The proceeds from the sales may be reinvested into other properties, used
to fund development operations or to support other corporate needs, or distributed
to our shareholders. Properties are considered held for sale when they meet specified
criteria (see note 2—Discontinued Operations). Depreciation on these properties is
discontinued at that time, but operating revenues, other operating expenses and interest
continue to be recognized until the date of sale. We have one property classified as
held for sale at December 31, 2009 and five as held for sale at December 31, 2008, as
follows (in thousands):
December 31,
Office property
Multifamily property
Industrial/Flex properties
Total
Less accumulated depreciation
Properties that were sold or classified as held for sale during the three years ending December 31, 2009 are as follows:
Disposition Date
May 13, 2009
July 23, 2009
July 31, 2009
November 13, 2009
Total 2009
June 6, 2008
Total 2008
September 26, 2007
Total 2007
Property
Avondale
Tech 100 Industrial Park
Brandywine Center
Crossroads Distribution Center
Charleston Business Center
Type
Multifamily
Industrial
Office
Industrial
Industrial
Sullyfield Center/The Earhart Building
Industrial
Maryland Trade Center I & II
Office
Rentable
Square Feet
(unaudited)
170,000
166,000
35,000
85,000
85,000
541,000
336,000
336,000
342,000
342,000
2009
$
—
—
4,915
$ 4,915
(1,074)
$ 3,841
Contract
Sales Price
(in thousands)
$19,800
10,500
3,300
4,400
Held for sale
$38,000
$41,100
$41,100
$58,000
$58,000
2008
$ 3,050
17,227
17,796
$ 38,073
(11,339)
$ 26,734
Gain on Sale
(in thousands)
$ 6,700
4,100
1,000
1,500
n/a
$13,300
$15,300
$15,300
$25,000
$25,000
Form 10-k Washington Real Estate Investment Trust
77
Operating income by each property classified as discontinued operations is summarized
below (in thousands):
Property
Maryland Trade Center I & II
Sullyfield Center
The Earhart Building
Avondale
Charleston Business Center
Tech 100 Industrial Park
Brandywine Center
Crossroads Distribution Center
Segment
Office
Industrial
Industrial
Multifamily
Industrial
Industrial
Office
Industrial
Operating Income for the Year Ending
December 31,
2008
—
$
1,070
421
861
718
668
192
199
$4,129
2009
—
$
—
—
392
688
261
85
153
$1,579
2007
$2,474
1,492
754
784
710
807
195
294
$7,510
Charleston Business Center, an industrial property, met the criteria necessary for
classification as held for sale as of March 31, 2009. Senior management has committed
to, and actively embarked upon, a plan to sell this asset and the sale is expected to
be completed within one year under terms usual and customary for such sales, with
no indications that the plan will be significantly altered or abandoned. Depreciation
on this property has been discontinued as of the date it was classified as held for sale,
but operating revenues and expenses continue to be recognized until the date of sale.
Under GAAP, revenues and expenses of properties that are classified as held for sale
are treated as discontinued operations for all periods presented in the consolidated
statements of income.
Operating results of the properties classified as discontinued operations are summarized
as follows (in thousands):
Operating Income for the Year Ending
December 31,
2008
$ 8,496
(3,128)
(1,239)
$ 4,129
2009
$ 3,346
(1,362)
(405)
$ 1,579
2007
$16,111
(5,940)
(2,661)
$ 7,510
Revenues
Property expenses
Depreciation and amortization
78
Annual Report 2009
Form 10-k
4. Mortgage Notes Payable
On September 27, 1999, we executed a $50.0 million mortgage note payable secured by Munson Hill Towers, Country Club Towers, Roosevelt Towers, Park Adams
Apartments and the Ashby of McLean. The mortgage bore interest at 7.14% per annum and interest only was payable monthly until October 1, 2009, at which time all unpaid
principal and interest would have been payable in full. On July 1, 2009, we prepaid this mortgage note payable in its entirety without any prepayment penalties.
On October 9, 2003, we assumed a $36.1 million mortgage note payable and a $13.7 million mortgage note payable as partial consideration for our acquisition of Prosperity
Medical Center. The mortgages bear interest at 5.36% per annum and 5.34% per annum respectively. Principal and interest are payable monthly until May 1, 2013, at which time
all unpaid principal and interest are payable in full.
On August 12, 2004, we assumed a $10.1 million mortgage note payable with an estimated fair value1 of $11.2 million, as partial consideration for our acquisition of Shady
Grove Medical Village II. The mortgage bears interest at 6.98% per annum. Principal and interest are payable monthly until December 1, 2011, at which time all unpaid principal
and interest are payable in full.
On December 22, 2004, we assumed a $15.6 million mortgage note payable with an estimated fair value1 of $17.8 million, and a $3.9 million mortgage note payable with an
estimated fair value1 of $4.2 million as partial consideration for our acquisition of Dulles Business Park. The mortgages bear interest at 7.09% per annum and 5.94% per annum,
respectively. Principal and interest are payable monthly until August 10, 2012, at which time all unpaid principal and interest are payable in full.
On March 23, 2005, we assumed a $24.3 million mortgage note payable with an estimated fair value1 of $25.0 million as partial consideration for our acquisition of Frederick Crossing.
The mortgage bears interest at 5.95% per annum. Principal and interest are payable monthly until January 1, 2013, at which time all unpaid principal and interest are payable in full.
On April 13, 2006, we assumed a $5.7 million mortgage note payable as partial consideration for the acquisition of 9707 Medical Center Drive. The mortgage bears interest at
5.32% per annum. Principal and interest are payable monthly until July 1, 2028, at which time all unpaid principal and interest are payable in full.
On June 22, 2006, we assumed a $4.9 million mortgage note payable as partial consideration for the acquisition of Plumtree Medical Center. The mortgage bears interest at
5.68% per annum. Principal and interest are payable monthly until March 11, 2013, at which time all unpaid principal and interest are payable in full.
On July 12, 2006, we assumed an $8.8 million mortgage note payable as partial consideration for the acquisition of 15005 Shady Grove Road. The mortgage bears interest at
5.73% per annum. Principal and interest are payable monthly until March 11, 2013, at which time all unpaid principal and interest are payable in full.
On August 25, 2006, we assumed a $34.2 million mortgage note payable as partial consideration for the acquisition of 20-50 West Gude Drive. The mortgage bears interest at
5.86% per annum. Principal and interest are payable monthly until February 11, 2013, at which time all unpaid principal and interest are payable in full.
On August 25, 2006, we assumed a $23.1 million mortgage note payable as partial consideration for the acquisition of The Crescent and The Ridges. The mortgage bears
interest at 5.82%2 per annum. Principal and interest are payable monthly until August 11, 20332 at which time all unpaid principal and interest are payable in full. The note may
be repaid without penalty on August 11, 2010.
On June 1, 2007, we assumed a $21.2 million mortgage note payable as partial consideration for the acquisition of Woodholme Medical Office Building. The mortgage bears
interest at 5.29% per annum. Principal and interest are payable monthly until November 1, 2015, at which time all unpaid principal and interest are payable in full.
On June 1, 2007, we assumed a $3.1 million mortgage note payable and a $3.0 million mortgage note payable as partial consideration for our acquisition of the Ashburn Farm
Office Park. The mortgages bear interest at 5.56% per annum and 5.69% per annum, respectively. Principal and interest are payable monthly until May 31, 2025 and July 31,
2023, respectively, at which time all unpaid principal and interest are payable in full.
On May 29, 2008, we executed three mortgage notes payable totaling $81.0 million secured by 3801 Connecticut Avenue, Walker House and Bethesda Hill. The mortgages
bear interest at 5.71% per annum and interest only is payable monthly until May 31, 2016, at which time all unpaid principal and interest are payable in full.
On December 2, 2008, we assumed a $101.9 million mortgage note payable with an estimated fair value1 of $91.7 million as partial consideration for the acquisition of 2445 M
Street. The mortgage bears interest at 5.62% per annum. Interest is payable monthly until January 6, 2017, at which time all unpaid principal and interest are payable in full.
On February 2, 2009, we executed a $37.5 million mortgage note payable secured by Kenmore Apartments. The mortgage bears interest at 5.37% per annum. Principal and
interest are payable monthly until March 1, 2019, at which time all unpaid principal and interest are payable in full.
December 31,
2009
2008
$
—
$ 50,000
44,975
45,811
9,688
9,992
18,969
19,610
22,798
23,304
5,121
5,278
4,601
4,684
8,313
8,468
32,170
32,815
21,888
22,277
20,599
20,897
5,073
5,291
81,029
81,029
93,084
91,830
37,143
$405,451
—
$421,286
1
2
The fair value of the mortgage notes payable was estimated upon acquisition by WrIT based upon market information and data, such as dealer quotes for instruments with similar terms and maturities. There is no notation when the fair value at
the inception of the mortgage is the same as the carrying value.
If the loan is not repaid on August 11, 2010, from and after August 11, 2010, the interest rate adjusts to one of the following rates: (i) the greater of (A) 10.82% or (B) the Treasury rate (determined as of August 11, 2010, and defined as the yield
calculated using linear interpolation approximating the period from August 11, 2010 to August 11, 2033 on the basis of Federal reserve Stat. release H.15-Selected Interest rates under the heading U.S. Governmental Security/Treasury Constant
Maturities) plus 5%; or (ii) if the Note is an asset of an entity formed for purposes of securitization and pursuant thereto securities rated by a rating agency have been issued, then the rate will equal: the greater of (A) 7.82% or (B) the Treasury
rate plus 2% . Due to the probability that the mortgage will not be paid off on August 11, 2010, the date reflected in the future maturities schedule is August 11, 2033.
Form 10-k Washington Real Estate Investment Trust
79
Total carrying amount of the above mortgaged properties was $645.2 million and
$666.0 million at December 31, 2009 and 2008, respectively. Scheduled principal
payments during the five years subsequent to December 31, 2009 and thereafter are
as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
Net discounts/premiums
Total
Principal Payments
$ 4,510
13,788
21,823
107,123
2,038
263,579
412,861
(7,410)
$405,451
5. Unsecured Lines of Credit Payable
As of December 31, 2009, we maintained a $75.0 million unsecured line of credit
maturing in June 2011 (“Credit Facility No. 1”) and a $262.0 million unsecured line of
credit maturing in November 2010 (“Credit Facility No. 2”).
Credit Facility No. 1
We had $28.0 million outstanding as of December 31, 2009 related to Credit Facility
No. 1, and $1.4 million in letters of credit issued, with $45.6 million unused and available
for subsequent acquisitions, capital improvements or general corporate purposes. We
had no balance outstanding under this facility at December 31, 2008. During 2009, we
borrowed $64.5 million to fund repurchases of convertible debt, fund the acquisition
Lansdowne Medical Office Building and pay dividends. We repaid $36.5 million using
proceeds from the May 2009 equity offering, equity issued under our sales agency
financing agreement and property sales.
Borrowings under the facility bear interest at our option of LIBOR plus a spread based
on the credit rating on our publicly issued debt or the higher of SunTrust Bank’s prime
rate and the Federal Funds Rate in effect plus 0.5% . The interest rate spread is currently
42.5 basis points. All outstanding advances are due and payable upon maturity in June
2011. Interest only payments are due and payable generally on a monthly basis. For
the years ended December 31, 2009, 2008 and 2007, we recognized interest expense
(excluding facility fees) of $40,300, $1,603,900 and $807,200, respectively, representing
an average interest rate of 0.70%, 5.16% and 5.52% , respectively.
In addition, we pay a facility fee based on the credit rating of our publicly issued debt
which currently equals 0.15% per annum of the $75.0 million committed capacity,
without regard to usage. Rates and fees may be adjusted up or down based on changes
80
Annual Report 2009
Form 10-k
in our senior unsecured credit ratings. For the years ended December 31, 2009, 2008
and 2007, we incurred facility fees of $114,100, $103,800 and $53,700, respectively.
Credit Facility No. 2
We had $100.0 million outstanding as of December 31, 2009 related to Credit Facility
No. 2, and $0.9 million in letters of credit issued, with $161.1 million unused and
available for subsequent acquisitions, capital improvements or general corporate
purposes. $67.0 million was outstanding under this facility at December 31, 2008.
During 2009, we borrowed $150.0 million to fund the repurchases of convertible
debt, prepay a mortgage note payable and prepay the $100.0 million term loan. We
repaid $117.0 million using proceeds from the May 2009 equity offering, equity issued
under our sales agency financing agreement and property sales.
Advances under this agreement bear interest at our option of LIBOR plus a spread based
on the credit rating of our publicly issued debt or the higher of Wells Fargo Bank’s prime
rate and the Federal Funds Rate in effect plus 0.5%. The interest rate spread is currently
42.5 basis points. However, the interest rate on the $100.0 million in borrowings used
to prepay the term loan is effectively fixed by interest rate swaps (see note 6 to the
consolidated financial statements). An interest rate swap currently fixes the interest rate
at 3.375% (2.95% plus the 42.5 basis point spread) through February 19, 2010. When a
forward interest rate swap becomes effective on February 20, 2010, we anticipate that
the interest rate on the $100.0 million borrowing will be 2.525% (2.10% plus 42.5 basis
points) through the forward interest rate swap’s maturity date of November 1, 2011. All
outstanding advances are due and payable upon maturity in November 2010. Interest
only payments are due and payable generally on a monthly basis. For the years ended
December 31, 2009, 2008 and 2007, we recognized interest expense (excluding facility
fees) of $513,500, $3,049,000 and $4,579,000 representing an average interest rate of
1.81%, 4.94% and 5.77%, respectively.
Currently, Credit Facility No. 2 requires us to pay the lender a facility fee on the total
commitment of 0.15% per annum. These fees are payable quarterly. For the years ended
December 31, 2009, 2008 and 2007, we incurred facility fees of $396,900, $393,400
and $304,200, respectively.
Credit Facility No. 3
Credit Facility No. 3 was a $70.0 million line of credit that was terminated on June 29, 2007
and replaced by Credit Facility No. 1. At December 31, 2006, $28.0 million was outstanding
under this facility, which was repaid during the first quarter of 2007 with proceeds from
the $150 million 3.875% convertible notes issued in January 2007. Advances under this
agreement bore interest at LIBOR plus a spread based on the credit rating on our publicly
issued debt. Interest only payments were due and payable on a monthly basis. For the
year ended December 31, 2007, we recognized interest expense (excluding facility fees) of
$96,400, representing an average interest rate of 5.90% per annum.
From July 2005 through June 2007, Credit Facility No. 3 required us to pay the lender
an annual facility fee on the total commitment of 0.15% , per annum. These fees were
payable quarterly. For the year ended December 31, 2007, we incurred facility fees
of $52,800.
Credit Facility No. 1 and No. 2 contain certain financial and non-financial covenants, all
of which we have met as of December 31, 2009.
Information related to revolving credit facilities is as follows (in thousands):
Total revolving credit facilities at December 31
Borrowings outstanding at December 31
Weighted average daily borrowings during the year
Maximum daily borrowings during the year
Weighted average interest rate during the year
Weighted average interest rate at December 31
2009
$337,000
128,000
33,656
128,000
2008
$337,000
67,000
91,262
192,500
2007
$275,000
192,500
95,642
192,500
1.62%
2.79%
5.01%
1.48%
5.73%
5.41%
6. Notes Payable
On February 20, 1998, we issued $50.0 million of 7.25% unsecured notes due February 25,
2028 at 98.653% to yield approximately 7.36%.
On March 17, 2003, we issued $60.0 million of 5.125% unsecured notes due March
2013. The notes bear an effective interest rate of 5.23%. Our total proceeds, net of
underwriting fees, were $59.1 million. We used portions of the proceeds of these notes
to repay advances on our lines of credit and to fund general corporate purposes.
On December 11, 2003, we issued $100.0 million of 5.25% unsecured notes due
January 2014. The notes bear an effective interest rate of 5.34% . Our total proceeds,
net of underwriting fees, were $99.3 million. We used portions of the proceeds of
these notes to repay advances on our lines of credit.
On April 26, 2005, we issued $50.0 million of 5.05% unsecured notes due May 1,
2012 and $50.0 million of 5.35% unsecured notes due May 1, 2015, at effective yields
of 5.064% and 5.359% respectively. The net proceeds from the sale of the notes
of $99.1 million were used to repay borrowings under our lines of credit totaling
$90.5 million and the remainder was used for general corporate purposes.
On October 6, 2005, we issued an additional $100.0 million of the series of 5.35%
unsecured notes due May 1, 2015, at an effective yield of 5.49%. $93.5 million of the
$98.1 million net proceeds from the sale of these notes was used to repay borrowings under
our lines of credit and the remainder was used to fund general corporate purposes.
On June 6, 2006, we issued $100.0 million of 5.95% unsecured notes due June 15, 2011
at 99.951% of par, resulting in an effective interest rate of 5.96% . Our total proceeds,
net of underwriting fees, were $99.4 million. We used the proceeds of these notes to
repay advances on one of our lines of credit.
On July 26, 2006, we issued an additional $50.0 million of the series of 5.95% unsecured
notes due June 15, 2011 at 100.127% of par, resulting in an effective yield of 5.92% . Our
total proceeds, net of underwriting fees, were $50.2 million. We used the proceeds
of these notes to repay borrowings under our lines of credit and to fund general
corporate purposes.
On September 11, 2006, we issued $100.0 million of 3.875% convertible notes due
September 15, 2026. On September 22, 2006, we issued an additional $10.0 million
of the 3.875% convertible notes due September 15, 2026, upon the exercise by the
underwriter of an over-allotment option granted by WRIT. The notes were issued at
99.5% of par. Our total proceeds, net of underwriting fees, were $106.7 million. We
used the proceeds of these notes to repay borrowings under our lines of credit and to
fund general corporate purposes.
On January 22, 2007, we issued an additional $135.0 million of the 3.875% convertible
notes due September 15, 2026. On January 30, 2007, we issued an additional
$15.0 million of the 3.875% convertible notes due September 15, 2026, upon the
exercise by the underwriter of an over-allotment option granted by WRIT. The notes
were issued at 100.5% of par. Our total proceeds, net of underwriting fees, were
$146.0 million. We used the proceeds of these notes to fund the acquisition of 270
Technology Park and a portion of the acquisition of Monument II, to repay borrowings
under our lines of credit and to fund general corporate purposes.
We recorded the 3.875% convertible notes in the consolidated balance sheets as
notes payable less a component of the total debt, representing the conversion feature,
which is bifurcated and recorded in equity. As a result, as of the inception of the
3.875% convertible notes, we classified $21.0 million of the 3.875% convertible notes’
original carrying amount into shareholders’ equity. We accrete to interest expense the
resulting discount on the debt over the expected life of the debt. The effective rate
on the 3.875% convertible notes after bifurcating the equity component reflects our
nonconvertible debt borrowing rate at the inception of the 3.875% convertible notes,
which was 5.875%.
The convertible notes are convertible into our common shares at the option of
the holder, under specific circumstances or on or after July 15, 2026, at an initial
exchange rate of 20.090 common shares per $1,000 principal amount of notes.
This is equivalent to an initial conversion price of $49.78 per common share, which
represents a 22% premium over the $40.80 closing price of our common shares at
the time the September 2006 transaction was priced and a 21% premium over the
$41.17 closing price of our common shares at the time the January 2007 transaction
was priced. Holders may convert their notes into our common shares prior to the
Form 10-k Washington Real Estate Investment Trust
81
maturity date based on the applicable conversion rate during any fiscal quarter if the
closing price of our common shares for at least 20 trading days in the 30 consecutive
trading day period ending on the last trading day of the immediate preceding
fiscal quarter is more than 130% of the conversion price per common share on
the last day of such preceding fiscal quarter. The initial conversion rate is subject
to adjustment in certain circumstances including an adjustment to the rate if the
quarterly dividend rate to common shareholders is in excess of $0.4125 per share.
In addition, the conversion rate will be adjusted if we make distributions of cash or
other consideration by us or any of our subsidiaries in respect of a tender offer or
exchange offer for our common shares, to the extent such cash and the value of any
such other consideration per common share validly tendered or exchanged exceeds
the closing price of our common shares as defined in the note offering. Upon an
exchange of notes, we will settle any amounts up to the principal amount of the
notes in cash and the remaining exchange value, if any, will be settled, at our option,
in cash, common shares or a combination thereof. The convertible notes could have
a dilutive impact on our earnings per share calculation in the future. However, these
convertible notes are not dilutive for the years ended December 31, 2009, 2008 and
2007, and are not included in our earnings per share calculations.
On or after September 20, 2011, we may redeem the convertible notes at a redemption
price equal to the principal amount of the convertible notes plus any accrued and unpaid
interest, if any, up to, but excluding, the purchase date. In addition, on September 15,
2011, September 15, 2016 and September 15, 2021 or following the occurrence of certain
change in control transactions prior to September 15, 2011, holders of these notes may
require us to repurchase the convertible notes for an amount equal to the principal
amount of the convertible notes plus any accrued and unpaid interest thereon.
During 2009, we repurchased $109.7 million of the convertible notes at an average of
87.9% of par, resulting in a net gain on extinguishment of debt of $6.8 million, net of
unamortized debt costs and debt discounts. During 2008, we repurchased $16.0 million
of the convertible notes at 75.0% of par, resulting in a net gain on extinguishment of
debt of $2.9 million, net of unamortized debt costs and debt discounts. No repurchases
were made during 2007. As of December 31, 2009 and 2008, the amount outstanding
on the convertible notes was $134.3 million and $244.0 million, respectively.
The interest expense recognized relating to the contractual interest coupon and relating
to the amortization of the discount was as follows (in millions):
2009
$6.6
$2.9
Years Ended December 31,
2008
$10.1
$ 4.3
2007
$9.7
$3.9
Contractual interest coupon
Amortization of the discount
82
Annual Report 2009
Form 10-k
The carrying amount of the equity component as of December 31, 2009 and 2008 is
$21.0 million. The net carrying amount of the principal is as follows (in thousands):
Principal, gross
Unamortized discount
Principal, net
December 31,
2009
$134,328
(4,307)
$130,021
2008
$244,000
(12,047)
$231,953
The remaining discount is being amortized through September, 2011, on the effective
interest method.
During the first quarter of 2008, we repaid the $60 million outstanding principal
balance under our 6.74% 10-year Mandatory Par Put Remarketed Securities
(“MOPPRS”) notes. The total aggregate consideration paid to repurchase the notes
was $70.8 million, which amount included the $8.7 million remarketing option value
paid to the remarketing dealer and accrued interest paid to the holders. The loss on
extinguishment of debt was $8.4 million, net of unamortized loan premium costs,
upon settlement of these securities.
On February 21, 2008, we entered into a $100 million unsecured term loan (the “Term
Loan”) with Wells Fargo Bank, National Association. The Term Loan had a maturity
date of February 19, 2010 and bore interest at our option of LIBOR plus 1.50% or Wells
Fargo’s prime rate.
On May 7, 2009, we entered into an agreement to modify the Term Loan with Wells
Fargo, National Association to extend the maturity date from February 19, 2010 to
November 1, 2011. This agreement also increased the interest rate on the Term Loan
from LIBOR plus 1.50% to LIBOR plus 2.75%. To hedge our exposure to interest rate
fluctuations on the Term Loan, we previously had entered into an interest rate swap
on a notional amount of $100 million through the original maturity date of February 19,
2010. This interest rate swap had the effect of fixing the LIBOR portion of the interest
rate on the term loan at 2.95% through February 2010. The interest rate after the
agreement to extend the maturity date, taking into account the swap, was 5.70%
(2.95% plus 275 basis points). On May 6, 2009, we entered into a forward interest
rate swap on a notional amount of $100 million for the period from February 20, 2010
through the maturity date of November 1, 2011. This forward interest rate swap had
the effect of fixing the LIBOR portion of the interest rate on the term loan at 2.10%
from February 20, 2010 through November 1, 2011. The interest rate for that time
period, taking into account the forward interest rate swap, would have been 4.85%
(2.10% plus 275 basis points). The forward interest rate swap agreement is scheduled
to settle contemporaneously with the maturity of the loan. These swaps qualify as cash
flow hedges as discussed in note 2 to the consolidated financial statements.
On December 1, 2009, we prepaid the $100 million unsecured term loan using proceeds
from our unsecured line of credit (see note 5 to the consolidated financial statements),
incurring a loss on extinguishment of debt of $1.5 million. The interest rate swaps
discussed in the preceding paragraph are now used to fix the current interest rate on
the $100.0 million borrowing on our unsecured lines of credit at 3.375% (2.95% plus the
42.5 basis point spread on our unsecured lines of credit). When the forward interest
rate swap becomes effective on February 20, 2010, we anticipate that the interest rate
on the $100.0 million borrowing will be 2.525% (2.10% plus 42.5 basis points) through
the forward interest rate swap’s maturity date of November 1, 2011.
The following is a summary of our unsecured note and term loan borrowings
(in thousands):
December 31,
5.70% term loan due 2011
5.95% notes due 2011
5.05% notes due 2012
5.125% notes due 2013
5.25% notes due 2014
5.35% notes due 2015
3.875% notes due 2026
7.25% notes due 2028
Discount on notes issued
Premium on notes issued
Total
2009
$
—
150,000
50,000
60,000
100,000
150,000
134,328
50,000
(5,435)
19
$688,912
2008
$100,000
150,000
50,000
60,000
100,000
150,000
244,000
50,000
(13,352)
31
$890,679
The required principal payments excluding the effects of note discounts or premium for
the remaining years subsequent to December 31, 2009 are as follows (in thousands):
2010
20111
2012
2013
2014
Thereafter
$
—
284,328
50,000
60,000
100,000
200,000
$694,328
1 We reflect the 3.875% convertible notes as maturing in 2011 on this schedule due to the fact that we may redeem
them at a redemption price equal to the principal amount of the notes plus any accrued and unpaid interest, if
any, up to, but excluding, the purchase date on or after September 20, 2011. In addition, on September 15, 2011,
September 15, 2016 and September 15, 2021 or following the occurrence of certain change in control transactions
prior to September 15, 2011, holders of these notes may require us to repurchase the notes for an amount equal to
the principal amount of the notes plus any accrued and unpaid interest thereon.
Interest on these notes is payable semi-annually. These notes contain certain financial
and non-financial covenants, all of which we have met as of December 31, 2009.
The covenants under our line of credit agreements require us to insure our properties
against loss or damage in amounts customarily maintained by similar businesses or as
they may be required by applicable law. The covenants for the notes require us to
keep all of our insurable properties insured against loss or damage at least equal to
their then full insurable value. We have an insurance policy which has no terrorism
exclusion, except for non-certified nuclear, chemical and biological acts of terrorism.
Our financial condition and results of operations are subject to the risks associated
with acts of terrorism and the potential for uninsured losses as the result of any such
acts. Effective November 26, 2002, under this existing coverage, any losses caused by
certified acts of terrorism would be partially reimbursed by the United States under
a formula established by federal law. Under this formula the United States pays 85%
of covered terrorism losses exceeding the statutorily established deductible paid by
the insurance provider, and insurers pay 10% until aggregate insured losses from all
insurers reach $100 billion in a calendar year. If the aggregate amount of insured losses
under this program exceeds $100 billion during the applicable period for all insured and
insurers combined, then each insurance provider will not be liable for payment of any
amount which exceeds the aggregate amount of $100 billion. On December 26, 2007,
the Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law
and extends the program through December 31, 2014.
7. Share Options and Grants
2007 Plan
In March 2007, the WRIT Board of Trustees adopted, and in July 2007 WRIT shareholders
approved, the Washington Real Estate Investment Trust 2007 Omnibus Long-Term
Incentive Plan (“2007 Plan”). This plan replaced the Share Grant Plan, which expired on
December 15, 2007, as well as the 2001 Stock Option Plan and Stock Option Plan for
Trustees. The shares and options granted pursuant to the above plans are not affected
by the adoption of the 2007 Plan. However, if an award under the Share Grant Plan is
forfeited or an award of options granted under the Option Plans expires without being
exercised, the shares covered by those awards will not be available for issuance under
the 2007 Plan.
The 2007 Plan provides for the award to WRIT’s trustees, officers and non-officer
employees of restricted shares, restricted share units, options and other awards
up to an aggregate of 2,000,000 shares over the ten year period in which the plan
will be in effect. Restricted share units are converted into shares of our stock upon
full vesting through the issuance of new shares. If an award under the 2007 Plan of
restricted shares or restricted share units is forfeited or an award of options or
any other rights granted under the 2007 Plan expires without being exercised, the
shares covered by any such award would again become available for issuance under
new awards.
Form 10-k Washington Real Estate Investment Trust
83
Elected deferrals of short term incentive awards by officers are converted into restricted
share units which vest immediately on the grant date and WRIT will match 25% of the
deferred short term incentive in restricted share units, which vest at the end of three
years. Dividends on these restricted share units are paid in the form of restricted
share units valued based on the market value of WRIT’s stock on the date dividends
are paid. We granted 876 and 4,783 restricted share units to officers in 2008 and
2007, respectively, pursuant to elective short term incentive deferrals. During 2008,
we granted 263 restricted share units on dividends. In 2009, we granted 458 restricted
share units on dividends.
Total compensation expense recognized in the consolidated financial statements for
all share based awards, including share grants, restricted share units and performance
share units, in each of the three years ending 2009 was (in millions):
20071
20081
20091
Stock-based
Compensation
Expense
$2.7
$2.2
$2.0
1
2007 included $0.6 million related to the accelerated vesting of prior CEo share grant awards as required by FASB
ASC 505-50 and 718-10 (formerly FAS 123(r), Share Based Payments). 2009 and 2008 included $0.1 million and
$0.2 million, respectively, related to the accelerated vesting of departing Chief Financial officer share grant and
restricted unit awards.
Options
The previous Option Plans provided for the grant of qualified and non-qualified
options. Options granted under the plans were granted with exercise prices equal to
the market price on the date of grant, vested 50% after year one and 50% after year
two and expire ten years following the date of grant. Options granted to trustees
were granted with exercise prices equal to the market price on the date of grant and
were fully vested on the grant date. As discussed in note 2 to the consolidated financial
statements, we accounted for option awards in accordance with APB No. 25, and
we have recognized no compensation cost for stock options. The last option awards
to officers were in 2002, to non-officer key employees in 2003 and to trustees in
2004. The following chart details the previously issued and currently outstanding and
exercisable stock options:
84
Annual Report 2009
Form 10-k
2009
2008
2007
Outstanding at January 1
Granted
Exercised
Expired/Forfeited
Outstanding at December 31
Exercisable at December 31
Wtd Avg
Shares Ex Price
$25.31
317,000
—
—
(2,750) $16.34
—
$25.39
$25.39
—
314,250
314,250
Shares
438,000
—
Wtd Avg
Ex Price Shares
451,000
$24.40
—
—
(119,000) $22.12
(2,000) $17.59
$25.31
$25.31
Wtd Avg
Ex Price
$24.42
—
(13,000) $25.07
—
$24.40
$24.40
—
438,000
438,000
317,000
317,000
The 314,250 options outstanding at December 31, 2009, all of which are exercisable,
have exercise prices between $21.34 and $33.09, with a weighted-average exercise
price of $25.39 and a weighted average remaining contractual life of 2.5 years. The
aggregate intrinsic value of outstanding exercisable shares at December 31, 2009 was
$0.7 million. The aggregate intrinsic value of options exercised was minimal in 2009
and $1.1 million and $0.1 million in 2008 and 2007, respectively. There were no options
forfeited in 2009.
Share Grants, Restricted Share Units and Performance Share Units
We previously maintained a Share Grant Plan for officers, trustees and other members
of management. In 2004 and 2005, we granted awards to officers and other members
of management in the form of restricted shares. We valued the awards based on the
fair market value at the date of grant. Shares vest ratably over a five year period from
the date of grant.
Beginning in 2005, we changed annual long-term incentive compensation for trustees
from options of 2,000 shares plus 400 restricted shares to $30,000 in restricted shares.
In May 2007, we increased the value of the restricted shares awarded to trustees to
$55,000. These shares vest immediately and are restricted from sale for the period of
the trustee’s service.
The 2007 Plan provides for the granting of restricted share units and performance share
units to officers and other members of management, based upon various percentages
of their salaries and their positions with WRIT. For officers, one-third of the award
is in the form of restricted share units that vest 20% per year based upon continued
employment and two-thirds of the award is in the form of performance share units
subject to performance and market conditions. For other members of management,
100% of the award is in the form of restricted share units awarded based on one-year
performance targets that vest ratably over five years from the grant date.
With respect to the officer performance share units that are subject to performance
conditions, awards are based on three-year cumulative performance targets, for which
targets will be set annually based on benchmarks with minimum and maximum payout
thresholds. As the three-year cumulative performance targets are set independently
each year, the grant date does not occur until all such targets are set and all of the
significant terms of the award are known. Because payouts are probable, we estimate
the compensation expense at each reporting period based on the current fair market
value of the probable award, until the vesting occurs and as progress towards meeting
target is known. We recognize the expense for such performance-based share units
ratably over the three-year period with cumulative catch-up adjustments recorded in
the current period. With respect to the officer performance share units that are subject
to market conditions, awards are based on a cumulative three-year market target
which is set at the beginning of the three-year period. We recognize compensation
expense ratably over the three-year service period, based on the grant date fair value,
as determined using a Monte Carlo simulation, and regardless of whether the market
conditions are achieved and the awards ultimately vest. All performance share units
awarded based on achievement of respective performance or market conditions cliff
vest at the end of the three-year period. The program provides that participants who
terminate prior to the end of the three-year performance period forfeit their entire
portion of the award.
The total fair value of shares vested during the years ending December 31, 2009,
2008 and 2007 is $1.1 million, $1.3 million and $2.9 million, respectively. As of
December 31, 2009, the total compensation cost related to non-vested share awards
not yet recognized was $36,300, which we expect to recognize over a weighted
average period of 14 months.
Restricted Share Units
Vested at January 1
Unvested at January 1
Granted
Vested during year
Expired/Forfeited
Unvested at December 31
Vested at December 31
2009
2008
2007
Wtd Avg
Grant
Wtd Avg
Grant
Wtd Avg
Grant
Shares Fair Value
$35.00
28,914
$30.63
106,562
88,414
$26.67
(34,942) $32.24
(1,628) $29.54
$28.08
$33.49
158,406
63,856
Shares Fair Value Shares Fair Value
$35.73
8,154
$34.35
80,831
$26.16
49,004
(20,760) $34.71
(2,513) $33.97
$30.63
$35.00
106,562
28,914
—
—
$39.54
21,877
67,355
$32.85
(8,154) $35.73
(247) $39.54
$34.35
$35.73
80,831
8,154
The total fair value of restricted share units vested during the years ending December 31,
2009, 2008 and 2007 is $0.8 million, $0.7 million and $0.3 million, respectively. The value of
unvested restricted share units at December 31, 2009 was $4.1 million, which we expect
to recognize as compensation cost over a weighted average period of 42 months.
The following are tables of activity for the years ended December 31, 2009, 2008 and
2007 related to our share grants, restricted share units, and performance share units.
Performance Share Units
Performance Share Units with Performance Conditions:
Share Grants
2009
2008
2007
2009
2008
2007
Wtd Avg
Grant
Wtd Avg
Grant
Wtd Avg
Grant
Vested at January 1
Unvested at January 1
Granted
Vested during year
Expired/Forfeited
Unvested at December 31
Vested at December 31
Shares Fair Value
$29.21
312,006
$35.04
34,849
14,427
$26.69
(47,283) $32.59
(123) $32.78
$32.50
1,870
$29.66
359,289
Shares Fair Value Shares Fair Value
$28.97
271,650
$34.15
62,530
13,019
$26.05
(40,356) $30.86
(344) $32.70
$35.04
$29.21
$27.17
191,217
$33.16
115,492
27,571
$34.57
(80,433) $32.85
(100) $32.50
$34.15
$28.97
34,849
312,006
62,530
271,650
Vested at January 1
Unvested at January 1
Granted
Vested during year
Expired/Forfeited
Unvested at December 31
Vested at December 31
Wtd Avg
Grant
Shares Fair Value
$30.41
43,000
$
—
—
$22.81
90,000
(36,600) $17.15
$
—
$26.69
$24.31
—
53,400
79,600
Wtd Avg
Grant
Wtd Avg
Grant
Shares Fair Value Shares Fair Value
—
43,000
—
$
—
$30.41
—
$
(43,000) $30.41
—
$
$
—
$30.41
—
—
43,000
—
—
43,000
—
—
43,000
—
—
$
$
—
$30.41
—
$
$
—
$30.41
—
$
Form 10-k Washington Real Estate Investment Trust
85
Performance Share Units with Market Conditions:
2009
Vested at January 1
Unvested at January 1
Granted
Vested during year
Expired/Forfeited
Unvested at December 31
Vested at December 31
Shares
—
—
37,000
—
—
37,000
—
Wtd Avg
Grant
Fair Value
—
$
$
—
$20.15
—
$
$
—
$20.15
—
$
The total fair value of performance share units vested during the years ending
December 31, 2009, 2008 and 2007 is $0.9 million, $1.4 million and $0.0 million,
respectively. As of December 31, 2009, the future expected expense related to
performance share units with performance conditions, estimated based on the probable
number of performance share units expected to vest under the current plan, totaled
$2.2 million, which we expect to recognize as compensation cost over a weighted
average period of 21 months. As of December 31, 2009, the future expected expense
related to performance share units with market conditions, totaled $0.5 million, which
we expect to recognize over a weighted average period of 24 months.
We determine the fair value of performance share units that contain market conditions
included in the chart above using a binomial model employing a Monte Carlo method
as of the grant date. The market condition performance measurement is the cumulative
three-year average total shareholder return relative to a defined population of 25 peer
companies. The model evaluates the awards for changing total shareholder return over
the term of vesting, relative to the peer group, and uses random simulations that are
based on past stock characteristics as well as income growth and other factors for
WRIT and each of the peer companies. There were no performance share units with
market conditions prior to 2009. The following are the average assumptions used to
the value awards granted as of December 31, 2009 and their respective determined
fair value:
Expected volatility
Risk-free interest rate
Expected life (from grant date)
Price of underlying stock at measurement date
Performance share unit grant date fair value
86
Annual Report 2009
Form 10-k
2009 Awards
33.4%
1.5%
3.0 years
$17.15
$20.15
We based the expected volatility upon the historical volatility of our monthly share
closing prices. We based the risk-free interest rate used on U.S. Treasury constant
maturity bonds on the measurement date with a maturity equal to the market
condition performance period. We based the expected term on the market condition
performance period.
8. Other Benefit Plans
We have a Retirement Savings Plan (the “401K Plan”), which permits all eligible
employees to defer a portion of their compensation in accordance with the Internal
Revenue Code. Under the 401K Plan, we may make discretionary contributions on
behalf of eligible employees. In each of the years ended December 31, 2009, 2008 and
2007, we made contributions to the 401K plan of $0.4 million.
We have adopted a non-qualified deferred compensation plan for the officers and
members of the Board of Trustees. The plan allows for a deferral of a percentage
of annual cash compensation and trustee fees. The plan is unfunded and payments
are to be made out of the general assets of WRIT. During 2008 the prior Chief
Executive Officer received a lump sum distribution of the present value of his deferred
compensation. The deferred compensation liability was $0.9 million and $0.8 million at
December 31, 2009 and 2008, respectively.
We established a Supplemental Executive Retirement Plan (“SERP”) effective July 1,
2002 for the benefit of our prior Chief Executive Officer. Under this plan, upon the
prior Chief Executive Officer’s termination of employment from WRIT for any reason
other than death, permanent and total disability, or discharge for cause, he is entitled
to receive an annual benefit equal to his accrued benefit times his vested interest. We
accounted for this plan in accordance with FASB ASC 715-30 (formerly SFAS No. 87,
Employers’ Accounting for Pensions), whereby we accrued benefit cost in an amount
that resulted in an accrued balance at the end of the prior Chief Executive Officer’s
employment in June 2007 which was not less than the present value of the estimated
benefit payments to be made. At December 31, 2009 the accrued benefit liability
was $1.7 million. For the three years ended December 31, 2009, 2008 and 2007, we
recognized current service cost of $124,000, $132,000 and $253,000, respectively. On
December 31, 2006, we adopted the recognition and disclosure provisions of FASB
ASC 715-20 (formerly SFAS No. 158, Employer’s Accounting for Defined Benefit Pension
and other Post retirement Plans). FASB ASC 715-20 required us to recognize the funded
status (i.e., the difference between the fair value of plan assets and the projected
benefit obligations) of its pension plan in the December 31, 2006 statement of financial
position, with a corresponding adjustment to accumulated other comprehensive
income, net of tax. Because the prior Chief Executive Officer’s SERP is unfunded, the
adoption of FASB ASC 715-20 did not have an effect on our consolidated financial
condition at December 31, 2006, or for any prior period presented and it will not
affect our operating results in future periods. We currently have an investment in
corporate owned life insurance intended to meet the SERP benefit liability since the
Chief Executive Officer’s retirement. Benefit payments to the prior Chief Executive
Officer began in 2008.
In November 2005, the Board of Trustees approved the establishment of a SERP
for the benefit of the officers, other than the prior Chief Executive Officer. This is a
defined contribution plan under which, upon a participant’s termination of employment
from WRIT for any reason other than death, discharge for cause or total and
permanent disability, the participant will be entitled to receive a benefit equal to the
participant’s accrued benefit times the participant’s vested interest. We account for
this plan in accordance with FASB ASC 710-10 (formerly EITF 97-14, Accounting for
Deferred Compensation Arrangements Where Amounts Earned are Held in a rabbi Trust
and Invested) and FASB ASC 320-10 (formerly SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities), whereby the investments are reported at fair
value, and unrealized holding gains and losses are included in earnings. For the years
ended December 31, 2009, 2008 and 2007, we recognized current service cost of
$280,000, $311,000 and $245,000, respectively.
9. Fair Value of Financial Instruments
The following disclosures of estimated fair value were determined by management
using available market information and established valuation methodologies, including
discounted cash flow. Many of these estimates involve significant judgment. The
estimated fair value disclosed may not necessarily be indicative of the amounts we
could realize on disposition of the financial instruments. The use of different market
assumptions or estimation methodologies could have an effect on the estimated fair
value amounts. In addition, fair value estimates are made at a point in time and thus,
estimates of fair value subsequent to December 31, 2009 may differ significantly from
the amounts presented.
Below is a summary of significant methodologies used in estimating fair values and a
schedule of fair values at December 31, 2009.
Derivatives
The company reports its interest rate swap at fair value in accordance with GAAP, and
thus the carrying value is the fair value.
Mortgage Notes Payable
Mortgage notes payable consist of instruments in which certain of our real estate assets
are used for collateral. The fair value of the mortgage notes payable is estimated based
primarily upon lender quotes for instruments with similar terms and maturities.
Lines of Credit Payable
Lines of credit payable consist of bank facilities which we use 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 given the adjustable rate of these
borrowings.
Notes Payable
The fair value of these securities is estimated based primarily on lender quotes for
securities with similar terms and characteristics.
(in thousands)
Cash and cash equivalents,
including restricted cash
2445 M Street note receivable
Interest rate hedge liability
Mortgage notes payable
Lines of credit payable
Notes payable
Carrying
Value
$ 30,373
$ 7,157
$ 1,757
$405,451
$128,000
$688,912
2009
2008
Fair
Value
Carrying
Value
Fair
Value
$ 30,373
$ 8,995
$ 1,757
$406,982
$128,000
$693,620
$ 30,697
$ 7,331
$ 2,335
$421,286
$ 67,000
$890,679
$ 30,697
$ 7,331
$ 2,335
$408,089
$ 67,000
$712,763
10. Rentals under Operating Leases
Non-cancelable commercial operating leases provide for minimum rental income
from continuing operations during each of the next five years and thereafter as
follows (in millions):
Cash and Cash Equivalents
Cash and cash equivalents includes cash and commercial paper with original maturities
of less than 90 days, which are valued at the carrying value, which approximates fair
value due to the short maturity of these instruments.
Notes Receivable
The fair value of the notes is estimated based on quotes for debt with similar terms and
characteristics or a discounted cash flow methodology using market discount rates if
reliable quotes are not available.
2010
2011
2012
2013
2014
Thereafter
Rental Income
$203.9
177.0
150.9
128.3
98.7
177.8
$936.6
Form 10-k Washington Real Estate Investment Trust
87
Apartment leases are not included as the terms are generally for one year. Most of
these commercial leases increase in future years based on agreed-upon percentages or
in some instances, changes in the Consumer Price Index. Percentage rents from retail
centers, based on a percentage of tenants’ gross sales, were $0.2 million, $0.4 million
and $0.3 million in 2009, 2008 and 2007, respectively. Real estate tax, operating expense
and common area maintenance reimbursement income from continuing operations
was $36.6 million, $30.9 million and $24.9 million for the years ended December 31,
2009, 2008 and 2007, respectively.
businesses and professions. Medical office buildings provide offices and facilities for a
variety of medical services. Retail centers are typically neighborhood grocery store or
drug store anchored retail centers. Multifamily properties provide rental housing for
families throughout the Washington metropolitan area. Industrial/flex centers are used
for flex-office, warehousing, services and distribution type facilities.
Real estate rental revenue as a percentage of the total for each of the five reportable
operating segments is as follows:
11. Commitments and Contingencies
Development Commitments
At December 31, 2009 and 2008, we had various contracts outstanding with third
parties in connection with our ongoing development projects. Remaining contractual
commitments for development projects at December 31, 2009 were $0.6 million.
Litigation
We are involved from time to time in various legal proceedings, lawsuits, examinations
by various tax authorities and claims that have arisen in the ordinary course of business.
Management believes that the resolution of such matters will not have a material
adverse effect on our financial condition or results of operations.
Other
At December 31, 2009, we were contingently liable under unused letters of credit in
the amounts of $885,000 and $815,000, related to our assumption of mortgage debt
on Dulles Business Park and West Gude, respectively, to ensure the funding of certain
tenant improvements and leasing commissions over the term of the debt. We were
also contingently liable under unused letters of credit totaling $536,000 related to our
development projects at Clayborne Apartments and Bennett Park, to ensure the complete
installation of public improvements in accordance with the projects’ related site plans.
12. Segment Information
We have five reportable segments: office, medical office, retail, multifamily and
industrial/flex properties. Office buildings provide office space for various types of
Office
Medical office
Retail
Multifamily
Industrial/Flex
2009
44%
15%
14%
15%
12%
Year Ended December 31,
2008
42%
16%
15%
13%
14%
2007
41%
15%
17%
13%
14%
The percentage of total income producing real estate assets, at cost, for each of the five
reportable operating segments is as follows:
Office
Medical office
Retail
Multifamily
Industrial/Flex
December 31,
2009
44%
17%
12%
14%
13%
2008
45%
16%
12%
14%
13%
The accounting policies of each of the segments are the same as those described in
note 2 to the consolidated financial statements. We evaluate performance based upon
operating income from the combined properties in each segment. Our reportable
operating segments are consolidations of similar properties. GAAP requires that
segment disclosures present the measure(s) used by the chief operating decision
maker for purposes of assessing segments’ performance. Net operating income is a
key measurement of our segment profit and loss. Net operating income is defined as
segment real estate rental revenue less segment real estate expenses.
88
Annual Report 2009
Form 10-k
The following table presents revenues and net operating income for the years ended December 31, 2009, 2008 and 2007 from these segments, and reconciles net operating
income of reportable segments to net income as reported (in thousands):
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
Interest expense
General and administrative
Other income
Gain on extinguishment of debt, net
Gain from non-disposal activities
Income from discontinued operations
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
Interest expense
General and administrative
Other income
Loss on extinguishment of debt, net
Gain from non-disposal activities
Income from discontinued operations
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
Office
$136,457
48,898
$ 87,559
Medical
Office
$ 44,911
15,218
$ 29,693
Retail
$ 41,821
10,680
$ 31,141
2009
Multifamily
$ 46,470
19,494
$ 26,976
Industrial/
Flex
$ 37,270
10,283
$ 26,987
Corporate
and Other
$
—
—
—
$
$ 14,200
$926,433
$ 6,613
$360,220
$ 1,270
$225,548
Office
$118,293
42,427
$ 75,866
Medical
Office
$ 43,594
14,177
$ 29,417
Retail
$ 40,987
9,647
$ 31,340
$ 2,287
$240,442
2008
Multifamily
$ 37,858
17,436
$ 20,422
$ 2,967
$251,986
$
351
$40,596
Industrial/
Flex
$ 37,959
9,812
$ 28,147
Corporate
and Other
$
—
—
—
$
$ 15,594
$952,112
$ 6,685
$346,725
$ 3,075
$230,917
$ 7,129
$264,457
$ 4,789
$268,689
$
642
$46,507
Consolidated
$ 306,929
104,573
$ 202,356
(94,042)
(75,001)
(13,906)
1,205
5,336
73
1,579
13,348
40,948
(203)
40,745
$
$
27,688
$2,045,225
Consolidated
$ 278,691
93,499
$ 185,192
(85,659)
(75,041)
(12,110)
1,073
(5,583)
17
4,129
15,275
27,293
(211)
27,082
$
$
37,914
$2,109,407
Form 10-k Washington Real Estate Investment Trust
89
Office
$101,987
34,569
$ 67,418
Medical
Office
$ 37,847
11,651
$ 26,196
Retail
$ 41,512
8,921
$ 32,591
2007
Multifamily
$ 31,364
13,462
$ 17,902
Industrial/
Flex
$ 36,189
8,756
$ 27,433
Corporate
and Other
$
—
—
—
$
$ 25,401
$771,614
$ 4,639
$345,202
$ 2,757
$230,851
$ 3,578
$209,448
$ 4,747
$289,227
$ 3,200
$50,676
Consolidated
$ 248,899
77,359
$ 171,540
(68,364)
(66,336)
(14,882)
1,875
1,303
7,510
25,022
57,668
(217)
57,451
$
44,322
$
$1,897,018
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
Interest expense
General and administrative
Other income
Gain from non-disposal activities
Income from discontinued operations
Gain on sale of real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
90
Annual Report 2009
Form 10-k
13. Selected Quarterly Financial Data (Unaudited)
The following table summarizes our financial data by quarter for 2009 and 2008 (in
thousands, except for per share data):
2009:
Real estate rental revenue
Income from continuing operations
Net income
Net income attributable to the controlling interests
Income from continuing operations per share
Basic
Diluted
Net income per share
Basic
Diluted
2008:
Real estate rental revenue
Income from continuing operations
Net income
Net income attributable to the controlling interests
Income from continuing operations per share
Basic
Diluted
Net income per share
Basic
Diluted
First
Quarter1,2
Second Third
Fourth
$77,194
$10,199
$10,900
$10,851
$76,262 $75,607 $77,866
$ 6,092 $ 4,229 $ 5,501
$13,142 $ 9,603 $ 7,303
$13,090 $ 9,550 $ 7,254
$ 0.19
$ 0.19
$ 0.11 $ 0.07 $ 0.09
$ 0.11 $ 0.07 $ 0.09
$ 0.20
$ 0.20
$ 0.23 $ 0.16 $ 0.12
$ 0.23 $ 0.16 $ 0.12
$68,489
$68,118 $69,798 $72,286
$ (4,204) $ 3,532 $ 3,945 $ 4,616
$ (2,667) $20,003 $ 4,629 $ 5,328
$ (2,724) $19,950 $ 4,581 $ 5,275
$ (0.09) $ 0.07 $ 0.08 $ 0.09
$ (0.09) $ 0.07 $ 0.08 $ 0.09
$ (0.06) $ 0.42 $ 0.09 $ 0.10
$ (0.06) $ 0.41 $ 0.09 $ 0.10
1 With regard to per share calculations, the sum of the quarterly results may not equal full year results due to rounding.
The prior quarter results have been restated to conform to the current quarter presentation. Specifically, results
2
related to properties sold or held for sale have been reclassified into discontinued operations.
used the net proceeds from the offering to repay borrowings under our lines of credit.
During the fourth quarter of 2008, we completed a public offering of 1.725 million
common shares priced at $35.00 per share, raising $57.6 million in net proceeds. We
used the net proceeds from the offering to repay borrowings under our lines of credit
and for general corporate purposes.
During the second quarter of 2009, we completed a public offering of 5.25 million
common shares priced at $21.40 per share, raising $107.5 million in net proceeds.
We used the net proceeds to repay a mortgage note payable, borrowings under our
unsecured lines of credit and for general corporate purposes.
During the fourth quarter of 2009, we entered into a sales agency financing agreement
with BNY Mellon Capital Markets, LLC relating to the issuance and sale of up to
$250.0 million of the our common shares from time to time over a period of no
more than 36 months, replacing a previous agreement made during the third quarter
of 2008. Sales of our common shares are made at market prices prevailing at the
time of sale. Net proceeds for the sale of common shares under this program are
used for the repayment of borrowings under our lines of credit, acquisitions, and
general corporate purposes. During 2009, we issued 2.0 million common shares at
a weighted average price of $27.37 under this program, raising $53.8 million in net
proceeds. During 2008, we issued 1.1 million common shares at a weighted average
price of $36.15 under this program, raising $40.7 million in net proceeds.
We have a dividend reinvestment program, whereby shareholders may use their
dividends and optional cash payments to purchase common shares. The common
shares sold under this program may either be common shares issued by us or common
shares purchased in the open market. Net proceeds under this program are used
for general corporate purposes. During 2009, we issued 88,460 common shares at a
weighted average price of $28.34 per share, raising $2.5 million in net proceeds. During
2008, we issued 125,348 common shares at a weighted average price of $32.75 per
share, raising $4.1 million in net proceeds.
14. Shareholders’ Equity
During the second quarter of 2008, we completed a public offering of 2.6 million
common shares priced at $34.80 per share, raising $86.7 million in net proceeds. We
15. Subsequent Events
Subsequent events have been evaluated through February 26, 2010, the date of issuance
for these consolidated financial statements and notes thereto.
Form 10-k Washington Real Estate Investment Trust
91
Schedule III Consolidated Real Estate and Accumulated Depreciation
Initial Cost(b)
Buildings
and
Net
Improvements
(Retirements)
since
Location
Land
Improvements Acquisition
Gross Amounts at Which Carried
at December 31, 2009
Buildings
and
Improvements
Land
Total(c)
Accumulated
Depreciation at
December 31,
2009
Year of
Date of
Construction Acquisition
420,000 $
DC $
336,000 $
VA $
299,000 $
VA $
287,000 $
VA $
322,000 $
VA $
VA $ 4,356,000 $
MD $ 2,851,000 $
MD $ 3,900,000 $
VA $ 2,861,000 $
VA $
269,000 $
DC $ 28,222,000 $
$ 44,123,000 $
892,000 $
DC $
MD $
840,000 $
VA $ 4,102,000 $
MD $ 1,180,000 $
MD $ 1,464,000 $
MD $ 4,621,000 $
DC $ 7,803,000 $
VA $ 6,661,000 $
VA $ 12,049,000 $
MD $ 2,296,000 $
MD $ 1,847,000 $
MD $
714,000 $
MD $ 1,564,000 $
VA $
0 $
MD $ 5,480,000 $
MD $ 3,182,000 $
DC $ 31,500,000 $
VA $ 1,326,000 $
VA $ 9,467,000 $
VA $ 15,001,000 $
MD $ 11,580,000 $
MD $ 2,060,000 $
420,000 $
2,678,000 $ 7,478,000 $
336,000 $
1,996,000 $ 8,685,000 $
299,000 $
2,562,000 $ 12,993,000 $
287,000 $
1,654,000 $ 8,041,000 $
322,000 $
3,337,000 $ 13,653,000 $
17,102,000 $ 12,924,000 $ 4,356,000 $
7,946,000 $ 6,147,000 $ 2,851,000 $
13,412,000 $ 11,217,000 $ 3,900,000 $
917,000 $ 78,007,000 $ 4,774,000 $
699,000 $
324,000 $ 28,222,000 $
10,576,000 $ 7,453,000
11,017,000 $ 5,831,000
15,854,000 $ 7,307,000
9,982,000 $ 6,009,000
17,312,000 $ 10,284,000
34,382,000 $ 13,851,000
16,944,000 $ 6,667,000
28,529,000 $ 9,862,000
81,785,000 $ 8,823,000
30,558,000 $ 3,624,000
33,955,000 $
62,501,000 $ 1,708,000
85,559,000 $189,758,000 $ 46,466,000 $ 272,974,000 $ 319,440,000 $ 81,419,000
10,156,000 $
10,681,000 $
15,555,000 $
9,695,000 $
16,990,000 $
30,026,000 $
14,093,000 $
24,629,000 $
77,011,000 $
29,859,000 $
34,279,000 $
0 $ 30,289,000 $
1951
1964
1965
1959
1963
1982
1971/03
1986
2007
2008
1948
1960
1975
1966
1970
1977
1971
1976
1973
18,113,000 $ 12,026,000
32,059,000 $ 20,323,000
12,961,000 $ 3,563,000
4,539,000 $ 1,597,000
5,967,000 $ 2,344,000
26,491,000 $ 12,072,000
23,337,000 $ 7,636,000
34,594,000 $ 10,862,000
17,221,000 $
892,000 $
3,481,000 $ 13,740,000 $
31,219,000 $
10,869,000 $ 20,350,000 $
840,000 $
8,859,000 $
3,931,000 $ 4,928,000 $ 4,102,000 $
3,359,000 $
1,262,000 $ 2,097,000 $ 1,180,000 $
4,503,000 $
1,554,000 $ 2,949,000 $ 1,464,000 $
21,870,000 $
11,926,000 $ 9,944,000 $ 4,621,000 $
15,535,000 $
11,366,000 $ 4,168,000 $ 7,802,000 $
27,933,000 $
16,742,000 $ 11,191,000 $ 6,661,000 $
71,825,000 $ 30,546,000 $ 12,049,000 $ 102,371,000 $ 114,420,000 $ 41,644,000 1972/86/99
16,516,000 $
12,188,000 $ 4,328,000 $ 2,296,000 $
14,212,000 $
11,105,000 $ 3,107,000 $ 1,847,000 $
5,107,000 $
4,053,000 $ 1,054,000 $
714,000 $
13,901,000 $
6,243,000 $ 7,658,000 $ 1,564,000 $
20,760,000 $
17,096,000 $ 3,664,000 $
0 $
51,293,000 $
39,107,000 $ 12,186,000 $ 5,480,000 $
13,538,000 $
11,281,000 $ 2,257,000 $ 3,182,000 $
56,261,000 $
54,327,000 $ 1,934,000 $ 31,500,000 $
19,451,000 $
18,211,000 $ 1,240,000 $ 1,326,000 $
43,811,000 $
1,225,000 $ 42,586,000 $ 9,467,000 $
4,080,000 $
494,000 $ 3,586,000 $ 15,001,000 $
47,803,000 $
43,240,000 $ 4,563,000 $ 11,580,000 $
10,752,000 $
9,451,000 $ 1,302,000 $ 2,061,000 $
18,812,000 $ 6,014,000
16,059,000 $ 5,894,000
5,821,000 $ 1,939,000
15,465,000 $ 4,227,000
20,760,000 $ 7,284,000
56,773,000 $ 16,299,000
16,720,000 $ 4,628,000
87,761,000 $ 14,601,000
20,777,000 $ 3,380,000 2001/03/05
53,278,000 $ 3,260,000
19,081,000 $
0
59,383,000 $ 6,947,000 1984/86/88
12,813,000 $ 1,336,000
1985
1982
1986
1970
1979
1974
1980
1979
2007
n/a
1989
Jan 1963
May 1965
Jul 1969
Jan 1969
Jan 1970
Aug 1996
Mar 1996
Nov 1997
Feb 2001
Jun 2003
Sep 2008
May 1977
Aug 1979
Jul 1992
Nov 1993
Nov 1993
Jan 1995
Nov 1995
Oct 1997
Nov 1997
May 1999
May 1999
Nov 1999
May 2000
Oct 2000
Apr 2001
July 2002
Aug 2003
July 2005
Dec 2005
Dec 2005
Aug 2006
Aug 2006
Net
Rentable
Square
Feet(e) Units Life(d)
Depreciation
179,000
170,000
163,000
173,000
259,000
252,000
159,000
226,000
268,000
87,000
270,000
308 30 Years
191 40 Years
227 35 Years
200 35 Years
279 33 Years
256 30 Years
212 30 Years
195 30 Years
224 28 Years
74 26 Years
374 30 Years
2,206,000 2,540
97,000
210,000
76,000
46,000
58,000
198,000
102,000
166,000
523,000
112,000
101,000
40,000
91,000
113,000
267,000
80,000
263,000
89,000
180,000
0
276,000
49,000
28 Years
41 Years
50 Years
50 Years
50 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
n/a
30 Years
30 Years
Properties
Multifamily Properties
3801 Connecticut Ave(a)
Roosevelt Towers
Country Club Towers
Park Adams
Munson Hill Towers
The Ashby at McLean
Walker House Apt(a)
Bethesda Hill Apt(a)
Bennett Park
The Clayborne
The Kenmore(a)
Office Buildings
1901 Pennsylvania Ave
51 Monroe St
515 King St
The Lexington Bldg
The Saratoga Bldg
6110 Executive Blvd
1220 19th St
1600 Wilson Blvd
7900 Westpark Dr
600 Jefferson Plaza
1700 Research Blvd
Parklawn Plaza
Wayne Plaza
Courthouse Sq
One Central Plaza
Atrium Bldg
1776 G St
Albermarle Point
Dulles Station I
Dulles Station II(f)
West Gude(a)
The Crescent(a)
92
Annual Report 2009
Form 10-k
Schedule III Consolidated Real Estate and Accumulated Depreciation (continued)
Initial Cost(b)
Buildings
and
Net
Improvements
(Retirements)
since
Gross Amounts at Which Carried
at December 31, 2009
Buildings
and
Improvements
Accumulated
Depreciation at
December 31,
2009
Location
Land
Land
Improvements Acquisition
MD $ 4,058,000 $
VA $ 5,584,000 $
VA $ 10,244,000 $
MD $ 2,194,000 $
DC $
0 $
DC $ 46,887,000 $ 106,743,000 $
Total(c)
24,170,000 $ 2,589,000
20,112,000 $
30,873,000 $ 3,680,000
25,289,000 $
76,401,000 $ 7,510,000
66,157,000 $
19,949,000 $ 1,746,000
17,755,000 $
63,173,000 $ 5,407,000
63,173,000 $
200,000 $ 46,887,000 $ 106,943,000 $ 153,830,000 $ 4,446,000
$194,596,000 $ 653,139,000 $196,645,000 $194,596,000 $ 849,784,000 $1,044,380,000 $213,254,000
19,207,000 $
905,000 $ 4,058,000 $
23,195,000 $ 2,094,000 $ 5,584,000 $
65,205,000 $
952,000 $ 10,244,000 $
16,711,000 $ 1,044,000 $ 2,194,000 $
0 $
61,101,000 $ 2,072,000 $
Year of
Date of
Construction Acquisition
Aug 2006
Aug 2006
Mar 2007
Jun 2007
Dec 2007
Dec 2008
1990
1967
2000
1989
1971
1986
Depreciation
Net
Rentable
Square
Feet(e) Units Life(d)
30 Years
104,000
30 Years
140,000
30 Years
205,000
30 Years
73,000
30 Years
227,000
30 Years
290,000
4,176,000
Properties
The Ridges(a)
6565 Arlington Blvd
Monument II
Woodholme Ctr
2000 M St
2445 M St(a)
Medical Office
Woodburn Medical Park I VA $ 2,563,000 $
Woodburn Medical Park II VA $ 2,632,000 $
8501 Arlington Blvd(a)
VA $ 2,071,000 $
8503 Arlington Blvd(a)
VA $ 1,598,000 $
8505 Arlington Blvd(a)
VA $ 2,819,000 $
Shady Grove Medical II(a) MD $ 1,995,000 $
VA $ 1,251,000 $
8301 Arlington Blvd
VA $ 6,783,000 $
Alexandria Prof Ctr
9707 Medical Ctr Dr(a)
MD $ 3,069,000 $
MD $ 4,094,000 $
15001 Shady Grove Rd
15005 Shady Grove Rd(a) MD $ 4,186,000 $
Plumtree Medical Ctr(a)
MD $ 1,723,000 $
2440 M St
DC $ 12,500,000 $
Woodholme Medical Ctr(a) MD $ 3,744,000 $
Ashburn Farm Prof Ctr(a)
VA $ 3,770,000 $
VA $ 2,062,000 $
CentreMed I & II
4661 Kenmore Ave(f)
VA $ 3,764,000 $
970,000 $
Sterling Medical Office Bldg VA $
VA $ 1,308,000 $
Lansdowne MOB
18,464,000 $ 5,833,000
24,028,000 $ 7,308,000
28,724,000 $ 6,067,000
27,622,000 $ 5,851,000
23,073,000 $ 4,479,000
18,794,000 $ 3,211,000
8,883,000 $ 1,566,000
29,438,000 $ 2,950,000
15,435,000 $ 1,839,000
22,053,000 $ 2,466,000
21,863,000 $ 2,259,000
8,334,000 $
927,000
53,273,000 $ 4,733,000
29,402,000 $ 2,757,000
23,634,000 $ 1,994,000 1998/00/02
15,036,000 $ 1,201,000
5,153,000 $
0
464,000
6,620,000 $
231,000
20,128,000 $
$ 62,902,000 $ 313,897,000 $ 23,158,000 $ 64,291,000 $ 335,666,000 $ 399,957,000 $ 56,136,000
12,460,000 $ 3,441,000 $ 2,563,000 $
17,574,000 $ 3,822,000 $ 2,632,000 $
336,000 $ 2,071,000 $
26,317,000 $
174,000 $ 1,598,000 $
25,850,000 $
574,000 $ 2,819,000 $
19,680,000 $
198,000 $ 1,995,000 $
16,601,000 $
6,589,000 $ 1,043,000 $ 1,251,000 $
19,676,000 $ 2,979,000 $ 6,783,000 $
11,777,000 $
589,000 $ 3,069,000 $
16,410,000 $ 1,549,000 $ 4,094,000 $
129,000 $ 4,186,000 $
17,548,000 $
5,749,000 $
862,000 $ 1,723,000 $
37,321,000 $ 3,452,000 $ 12,500,000 $
24,587,000 $ 1,071,000 $ 3,744,000 $
664,000 $ 3,770,000 $
19,200,000 $
468,000 $ 2,062,000 $
12,506,000 $
0 $ 1,389,000 $ 5,153,000 $
970,000 $
42,000 $ 1,308,000 $
15,901,000 $
21,396,000 $
26,653,000 $
26,024,000 $
20,254,000 $
16,799,000 $
7,632,000 $
22,655,000 $
12,366,000 $
17,959,000 $
17,677,000 $
6,611,000 $
40,773,000 $
25,658,000 $
19,864,000 $
12,974,000 $
0 $
5,650,000 $
18,820,000 $
1984
1988
2000
2001
2002
1999
1965
1968
1994
1999
2002
1991
1986/06
1996
5,274,000 $
18,778,000 $
1998
n/a
1986
2009
376,000 $
Retail Centers
415,000 $
MD $
Takoma Park
519,000 $
MD $
Westminster
413,000 $
VA $
Concord Centre
MD $
796,000 $
Wheaton Park
Bradlee
VA $ 4,152,000 $
Chevy Chase Metro Plaza DC $ 1,549,000 $
MD $ 11,625,000 $
Montgomery Village Ctr
96,000 $
1,084,000 $
1,775,000 $ 9,429,000 $
850,000 $ 3,297,000 $
857,000 $ 4,066,000 $
415,000 $
519,000 $
413,000 $
796,000 $
5,383,000 $ 7,879,000 $ 4,152,000 $
4,304,000 $ 4,198,000 $ 1,549,000 $
9,105,000 $ 2,704,000 $ 11,625,000 $
1,180,000 $
11,204,000 $
4,147,000 $
4,923,000 $
13,262,000 $
8,502,000 $
11,809,000 $
1,595,000 $ 1,090,000
11,723,000 $ 5,035,000
4,560,000 $ 2,672,000
5,719,000 $ 2,727,000
17,414,000 $ 7,956,000
10,051,000 $ 4,731,000
23,434,000 $ 4,193,000
1962
1969
1960
1967
1955
1975
1969
Nov 1998
Nov 1998
Oct 2003
Oct 2003
Oct 2003
Aug 2004
Oct 2004
Apr 2006
Apr 2006
Apr 2006
Jul 2006
Jun 2006
Mar 2007
Jun 2007
Jun 2007
Aug 2007
Aug 2007
May 2008
Aug 2009
Jul 1963
Sep 1972
Dec 1973
Sep 1977
Dec 1984
Sep 1985
Dec 1992
71,000
96,000
92,000
88,000
75,000
66,000
49,000
113,000
38,000
51,000
52,000
33,000
110,000
125,000
75,000
52,000
0
36,000
87,000
1,309,000
51,000
151,000
76,000
72,000
168,000
49,000
198,000
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
n/a
30 Years
30 Years
50 Years
37 Years
33 Years
50 Years
40 Years
50 Years
50 Years
Form 10-k Washington Real Estate Investment Trust
93
Schedule III Consolidated Real Estate and Accumulated Depreciation (continued)
Initial Cost(b)
Buildings
and
Net
Improvements
(Retirements)
since
Gross Amounts at Which Carried
at December 31, 2009
Buildings
and
Improvements
Accumulated
Depreciation at
December 31,
2009
Year of
Date of
Construction Acquisition
Location
Land
Land
Improvements Acquisition
VA $ 5,838,000 $
MD $ 6,561,000 $
VA $ 2,904,000 $
MD $ 13,029,000 $
MD $ 12,759,000 $
MD $ 4,928,000 $
MD $ 11,612,000 $
Total(c)
21,701,000 $ 3,080,000
15,864,000 $ 4,832,000
13,841,000 $ 2,339,000 1951/55/59/90
38,884,000 $ 6,898,000
48,795,000 $ 6,344,000 1999–2003
18,548,000 $ 1,872,000
36,174,000 $ 3,220,000
$ 77,100,000 $ 134,983,000 $ 56,220,000 $ 77,100,000 $ 191,203,000 $ 268,303,000 $ 56,989,000
2,979,000 $ 12,884,000 $ 5,838,000 $
6,830,000 $ 2,473,000 $ 6,561,000 $
5,489,000 $ 5,448,000 $ 2,904,000 $
440,000 $ 13,029,000 $
25,415,000 $
559,000 $ 12,759,000 $
35,477,000 $
595,000 $ 4,928,000 $
13,025,000 $
22,410,000 $ 2,152,000 $ 11,612,000 $
15,863,000 $
9,303,000 $
10,937,000 $
25,855,000 $
36,036,000 $
13,620,000 $
24,562,000 $
1972
1970
1960
1973
2000
Jun 1994
Aug 1995
Jun 1998
Jun 2002
Mar 2005
May 2006
May 2006
Depreciation
Net
Rentable
Square
Feet(e) Units Life(d)
50 Years
134,000
30 Years
227,000
30 Years
44,000
30 Years
332,000
30 Years
295,000
30 Years
82,000
143,000
30 Years
2,022,000
950,000 $
VA $
MD $ 2,045,000 $
VA $
878,000 $
MD $ 1,335,000 $
862,000 $
MD $
VA $ 3,300,000 $
VA $ 4,971,000 $
372,000 $
VA $
913,000 $
VA $
VA $ 1,052,000 $
MD $
246,000 $
VA $ 2,465,000 $
MD $ 1,771,000 $
VA $ 6,085,000 $
VA $ 6,159,000 $
MD $ 7,048,000 $
MD $ 2,035,000 $
MD $ 4,704,000 $
MD $ 4,724,000 $
950,000 $
3,317,000 $ 1,295,000 $
779,000 $ 2,045,000 $
2,091,000 $
3,298,000 $
878,000 $
796,000 $
6,466,000 $ 2,679,000 $ 1,335,000 $
862,000 $
4,996,000 $ 2,022,000 $
4,920,000 $ 1,955,000 $ 3,300,000 $
25,670,000 $ 10,914,000 $ 4,971,000 $
372,000 $
1,489,000 $
179,000 $
913,000 $
5,997,000 $ 1,460,000 $
6,506,000 $ 1,345,000 $ 1,052,000 $
1,987,000 $
246,000 $
663,000 $ 2,464,000 $
8,397,000 $
322,000 $ 1,771,000 $
9,230,000 $
50,504,000 $ 2,413,000 $ 6,084,000 $
315,000 $ 6,159,000 $
40,154,000 $
779,000 $ 7,048,000 $
16,223,000 $
9,236,000 $
278,000 $ 2,035,000 $
815,000 $ 4,704,000 $
21,115,000 $
5,519,000 $ 1,324,000 $ 4,724,000 $
104,000
1980
5,562,000 $ 2,388,000
85,000
1973
4,915,000 $ 1,075,000
87,000
1981/82
4,972,000 $ 1,940,000
167,000
1985
10,480,000 $ 4,036,000
107,000
1986
7,880,000 $ 3,124,000
246,000
1973
10,175,000 $ 2,937,000
787,000
1968/91
41,555,000 $ 16,392,000
32,000
1985
2,040,000 $
713,000
83,000
1988
8,370,000 $ 2,457,000
95,000
1986
8,903,000 $ 2,669,000
31,000
1986
2,251,000 $
684,000
137,000
1980/82
11,525,000 $ 2,225,000
141,000
2000
11,323,000 $ 1,892,000
59,002,000 $ 10,850,000 1999/04/05 Dec 04/Apr 05 324,000
207,000
46,628,000 $ 6,775,000 2001/03/05
302,000
24,050,000 $ 2,816,000
102,000
11,549,000 $ 1,438,000
157,000
26,634,000 $ 2,570,000
150,000
466,000
11,567,000 $
3,344,000
$ 51,915,000 $ 227,115,000 $ 30,351,000 $ 51,913,000 $ 257,468,000 $ 309,381,000 $ 67,447,000
13,057,000 2,540
$430,636,000 $1,414,693,000 $496,132,000 $434,366,000 $1,907,095,000 $2,341,461,000 $475,245,000
4,612,000 $
2,870,000 $
4,094,000 $
9,145,000 $
7,018,000 $
6,875,000 $
36,584,000 $
1,668,000 $
7,457,000 $
7,851,000 $
2,005,000 $
9,061,000 $
9,552,000 $
52,918,000 $
40,469,000 $
17,002,000 $
9,514,000 $
21,930,000 $
6,843,000 $
Sep 1985
Nov 1993
Oct 1996
Feb 1997
Feb 1997
Oct 1997
May 1998
Sep 1998
Jan 1999
Apr 1999
Sep 1999
Jan 2003
Mar 2004
Jul 2005
Feb 2006
May 2006
Feb 2007
Feb 2008
1989/05
2005
1986/87
1969
18,000 $
50 Years
50 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
30 Years
Properties
Shoppes of Foxchase
Frederick County Sq
800 S. Washington St
Centre at Hagerstown
Frederick Crossing(a)
Randolph Shopping Ctr
Montrose Shopping Ctr
Industrial Properties
Fullerton Business Ctr
Charleston Business Ctr
The Alban Business Ctr
Ammendale Tech Park I
Ammendale Tech Park II
Pickett Industrial Park
Northern VA Ind. Park
8900 Telegraph Rd
Dulles South IV
Sully Sq
Amvax
Fullerton Industrial Ctr
8880 Gorman Rd
Dulles Business Park(a)
Albemarle Point Place
Hampton
9950 Business Pkwy
270 Technology Park
6100 Columbia Park Dr
Total
(a) At December 31, 2009, our properties were encumbered by non-recourse mortgage amounts as follows: $32,170,000 on West Gude Drive, $21,888,000 on The ridges and The Crescent, $93,084,000 on 2445 M Street, $44,975,000 on Prosperity
Medical Center, $9,688,000 on Shady Grove Medical Village, $5,121,000 on 9707 Medical Center Drive, $8,313,000 on 15005 Shady Grove road, $4,601,000 on Plum Tree Medical Center, $20,599,000 on Woodholme Medical Center, $5,073,000 on
Ashburn Farm office Park II, $22,798,000 on Frederick Crossing, $35,399,000 on 3801 Connecticut Avenue, $16,531,000 on Walker House, $29,099,000 on Bethesda Hill, $18,969,000 on Dulles Business Park and $37,143,000 on The Kenmore.
(b) The purchase cost of real estate investments has been divided between land and buildings and improvements on the basis of management’s determination of the fair values.
(c) At December 31, 2009, total land, buildings and improvements are carried at $2,507,428,000 for federal income tax purposes.
(d) The useful life shown is for the main structure. Buildings and improvements are depreciated over various useful lives ranging from 3 to 50 years.
(e) residential properties are presented in gross square feet.
(f) As of December 31, 2009, WrIT had under development an office project with 360,000 square feet of office space and a parking garage to be developed in Herndon, VA (Dulles Station Phase II). WrIT also held a 0.8 acre parcel of land at 4661 Kenmore
for future medical office development. Additionally, WrIT had investments in various smaller development or redevelopment projects. The total land value not yet placed in service of our development projects at December 31, 2009 was $20.2 million.
94
Annual Report 2009
Form 10-k
Summary of Real Estate Investments and
Accumulated Depreciation
The following is a reconciliation of real estate assets and accumulated depreciation for
the years ended December 31, 2009, 2008 and 2007:
(in thousands)
Real estate assets
Balance, beginning of period
Additions—property acquisitions1
—improvements1
Deductions—write-off of disposed assets
Deductions—property sales
Balance, end of period
Accumulated depreciation
Balance, beginning of period
Additions—depreciation
Deductions—write-off of disposed assets
Deductions—property sales
Balance, end of period
2009
2008
2007
$2,326,646
20,086
30,399
(2,451)
(33,219)
$2,341,461
$ 406,241
82,022
(2,451)
(10,567)
$ 475,245
$2,093,268
219,380
45,105
(1,004)
(30,103)
$2,326,646
$ 338,468
75,254
(1,004)
(6,477)
$ 406,241
$1,716,457
313,355
106,805
(454)
(42,895)
$2,093,268
$ 290,003
62,274
(454)
(13,355)
$ 338,468
1
Includes non-cash accruals for capital items and assumed mortgages.
Form 10-k Washington Real Estate Investment Trust
95
Exhibit 31a Certification
I, George F. McKenzie, certify that:
1.
2.
3.
4.
I have reviewed this Amendment No. 1 to the annual report on Form 10-K of
Washington Real Estate Investment Trust;
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a.
b.
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
c.
d.
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonable likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonable likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 12, 2010
/s/ George F. McKenzie
George F. McKenzie
Chief Executive Officer
96
Annual Report 2009
Form 10-k
Exhibit 31b Certification
I, Laura M. Franklin, certify that:
1.
2.
3.
4.
I have reviewed this Amendment No. 1 to the annual report on Form 10-K of
Washington Real Estate Investment Trust;
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a.
b.
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c.
d.
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonable likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonable likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 12, 2010
/s/ Laura M. Franklin
Laura M. Franklin
Executive Vice President
Accounting, Administration and
Corporate Secretary
Form 10-k Washington Real Estate Investment Trust
97
Exhibit 31c Certification
I, William T. Camp, certify that:
1.
2.
3.
4.
I have reviewed this Amendment No. 1 to the annual report on Form 10-K of
Washington Real Estate Investment Trust;
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a.
b.
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
c.
d.
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonable likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonable likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 12, 2010
/s/ William T. Camp
William T. Camp
Chief Financial Officer
98
Annual Report 2009
Form 10-k
Exhibit 32 Written Statement of Chief Executive
Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned, the President and Chief Executive Officer, the Executive Vice
President Accounting, Administration and Corporate Secretary, and the Chief Financial
Officer of Washington Real Estate Investment Trust (“WRIT”), each hereby certifies
on the date hereof, that:
(a)
the Amendment No. 1 to the Annual Report on Form 10-K for the year
ended December 31, 2009 filed on the date hereof with the Securities and
Exchange Commission (the “Report”) fully complies with the requirements
of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and
(b)
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of WRIT.
Dated: March 12, 2010
/s/ George F. McKenzie
George F. McKenzie
President & CEO
Dated: March 12, 2010
/s/ Laura M. Franklin
Laura M. Franklin
Executive Vice President
Accounting, Administration and
Corporate Secretary
Dated: March 12, 2010
/s/ William T. Camp
William T. Camp
Chief Financial Officer
Form 10-k Washington Real Estate Investment Trust
99
WRIT Direct
WRIT’s dividend reinvestment plan permits
cash investment of up to the amount specified
in the plan, plus dividends, 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, D.C. 20006-5413
Annual CEO Certification
WRIT submitted the CEO Certification
required by the NYSE under Section 303A.
12(a) without qualifications.
Performance Graph
Set forth below is a graph comparing the cumulative total shareholder
return (assumes reinvestment of dividends) on WRIT shares with the
cumulative total return of companies making up the Standard & Poor’s
500 Stock Index and the MSCI US REIT Index. The MSCI US REIT
Index is a total-return index representing approximately 85% of the
US REIT universe.
Comparison of Five Year Cumulative Total Return
$200
$150
$100
$50
$0
2004
2005
2006
2007
2008
2009
WRIT
MSCI US REIT Index
S&P 500
Corporate Information
Corporate Headquarters
Washington Real Estate Investment Trust
6110 Executive Boulevard, Suite 800
Rockville, Maryland 20852-3927
301.984.9400
800.565.9748
Fax 301.984.9610
www.writ.com
Counsel
Arent Fox LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Independent Registered
Public Accounting Firm
Ernst & Young LLP
8484 Westpark Drive
McLean, Virginia 22102
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, Rhode Island 02940-3078
Annual Meeting
WRIT will hold its annual meeting of
stockholders on May 18, 2010, at 11:00 a.m. at
the Bethesda North Marriott Hotel &
Conference Center, 5701 Marinelli Road,
North Bethesda, Maryland.
100 Annual Report 2009 Corporate Information
On January 8, 2010, Writ commenced its 50th year
by ringing the closing bell at the new York Stock
exchange. at the ceremony, edmund b. cronin, Jr.,
chairman, and george F. “Skip” Mckenzie, president
and chief executive Officer, were joined by members
of management and the board of trustees. Founded in
1960, Writ is the oldest publicly traded reit formed
under the landmark real estate investment trust
act, enabling small and retail investors to more easily
participate in large-scale, income-producing real
estate investments.
Officers
George F. McKenzie
president and
Chief Executive Officer
Laura M. Franklin
Executive vice president
accounting, administration
and Corporate Secretary
William T. Camp
Executive vice president
and Chief Financial Officer
Thomas C. Morey
Senior vice president
and General Counsel
Michael S. Paukstitus
Senior vice president,
Real Estate
Thomas L. regnell
Senior vice president,
acquisitions
James B. Cederdahl
managing Director,
property management
david A. dinardo
managing Director,
leasing
Trustees
edmund B. Cronin, Jr.
Chairman of the
Board of Trustees,
Washington Real Estate
Investment Trust
Chairman, Georgetown
university hospital
edward S. Civera
Chairman,
Catalyst health Solutions, Inc.
John M. derrick, Jr.
Retired Chairman,
president and
Chief Executive Officer,
pepco holdings, Inc.
Terence C. Golden
Chairman,
Bailey Capital Corporation
John P. Mcdaniel
Retired Chief Executive Officer,
medStar health
George F. McKenzie
president and Chief Executive
Officer, Washington Real Estate
Investment Trust
Charles T. nason
Retired Chairman,
president and
Chief Executive Officer,
The acacia Group
Thomas edgie russell, iii
Retired president and
Chief Executive Officer,
partners Realty Trust Inc.
Wendelin A. White
partner,
pillsbury Winthrop
Shaw pittman llp
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Returns
$10,000 invested in WRIT since December 31, 1971, with dividends reinvested,
would be worth $2,818,765 as of December 31, 2009.
$3,000,000
$2,000,000
$1,000,000
1971
Annualized Compound
Total Return
Writ
nareit equity
S&p 500
16.0%
11.6%
9.8%
Price Return
Writ
naSdaQ
dJia
8.9%
8.2%
6.7%
Source: Bloomberg, www.nareit.com, WRIT
2009
6110 Executive Boulevard, Suite 800, Rockville, maryland 20852-3927 301.984.9400 800.565.9748 Fax 301.984.9610 www.writ.com