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WRE > SEC Filings for WRE > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for WASHINGTON REAL ESTATE INVESTMENT TRUST

Form 10-Q for WASHINGTON REAL ESTATE INVESTMENT TRUST


5-Aug-2014

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 3, 2014.
We refer to the three months ended June 30, 2014 and June 30, 2013 as the "2014 Quarter" and the "2013 Quarter," respectively, and the six months ended June 30, 2014 and June 30, 2013 as the "2014 Period" and the "2013 Period," respectively. Forward-Looking Statements
This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements include 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 these statements. The following important factors, in addition to those discussed elsewhere in this Form 10-Q, 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 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" in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 3, 2014. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise. General
Introductory Matters
We provide our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows:
Overview. Discussion of our business, operating results, investment activity and capital requirements, and summary of our significant transactions to provide context for the remainder of MD&A.

            Results of Operations. Discussion of our financial results comparing
             the 2014 Quarter to the 2013 Quarter and the 2014 Period to the 2013
             Period.


            Liquidity and Capital Resources. Discussion of our financial
             condition and analysis of changes in our capital structure and cash
             flows.


            Critical Accounting Policies and Estimates. Descriptions of
             accounting policies that reflect significant judgments and estimates
             used in the preparation of our consolidated financial statements.

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;


            Occupancy, calculated as occupied square footage as a percentage of
             total square footage as of the last day of that period;


            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; and


Leasing activity, including new leases, renewals and expirations.

For purposes of evaluating comparative operating performance, we categorize our properties as "same-store", "non-same-store" or discontinued operations. A "same-store" property is one that was owned for the entirety of the periods being evaluated and excludes properties under redevelopment or development and properties purchased or sold at any time during the periods being compared. A "non-same-store" property is one that was acquired, under redevelopment or development, or placed into service during either of the periods being evaluated. We define redevelopment properties as those for which we expect to spend significant development and construction costs on existing or acquired buildings pursuant to a formal plan which has a current impact on operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. Properties under redevelopment or development are included within the non-same-store properties beginning in the period during which redevelopment or development activities commence. Redevelopment and development properties are included in the same-store pool upon completion of the redevelopment or development, and the earlier of achieving 90% occupancy or two years after completion.

Overview

Business

Our revenues are derived primarily from the ownership and operation of income-producing properties in the greater Washington metro region. As of June 30, 2014, we owned a diversified portfolio of 54 properties, totaling approximately 7.3 million square feet of commercial space and 2,540 multifamily units, and land held for development. These 54 properties consisted of 25 office properties, 16 retail centers and 13 multifamily properties.

Operating Results

Real estate rental revenue, NOI, net income attributable to the controlling
interests and FFO for the three months ended June 30, 2014 and 2013 were as
follows (in thousands):
                                       Three Months Ended June 30,
                                           2014             2013         $ Change       % Change
Real estate rental revenue           $       72,254     $   65,915     $    6,339           9.6  %
NOI (1)                              $       46,726     $   42,245     $    4,481          10.6  %
Net income attributable to the

controlling interests $ 1,087 $ 5,263 $ (4,176 ) (79.3 )% FFO (2) $ 25,206 $ 30,845 $ (5,639 ) (18.3 )%

(1) See page 25 of the MD&A for reconciliations of NOI to net income.
(2) See page 35 of the MD&A for reconciliations of FFO to net income.

The increase in NOI is due to acquisitions and higher NOI from same-store properties primarily due to higher occupancy and rental rates. Same-store occupancy increased to 92.6% from 90.0% one year ago, with increases in all segments.

Investment Activity

We acquired 1775 Eye Street, NW, an office property in Washington, DC, during the 2014 Quarter. We funded the purchase price with proceeds from the sale of the Medical Office Portfolio. This acquisition is consistent with our current strategy of focusing on properties inside the Washington metro region's Beltway, near major transportation nodes and in areas of strong employment drivers and superior growth demographics.
Capital Requirements
There are no debt maturities for the remainder of 2014, though we will continue to make recurring principal amortization payments. As of June 30, 2014, our unsecured lines of credit had no borrowings outstanding, leaving a remaining borrowing capacity of $500.0 million.


Significant Transactions
Our significant transactions during the 2014 and 2013 Periods are summarized as
follows:
2014 Period
            The disposition of the Woodburn Medical Park I and II and Prosperity
             Medical Center I, II and III medical office buildings with a
             combined 427,000 square feet, for a contract sales price of $193.6
             million, resulting in a gain on sale of $106.0 million. These sales
             transactions completed the disposition of the Medical Office
             Portfolio.


            The acquisition of Yale West, a 216-unit multifamily property in
             Washington, DC, for a contract purchase price of $73.0 million. We
             assumed a $48.2 million mortgage with this acquisition. We incurred
             $1.8 million of acquisition costs related to this transaction.


            The acquisition of The Army Navy Club Building, a 108,000 square
             foot office property in Washington, DC, for a contract purchase
             price of $79.0 million. We assumed a $52.7 million mortgage with
             this acquisition. We incurred $1.3 million of acquisition costs with
             this transaction.


            The acquisition of 1775 Eye Street, NW, a 185,000 square foot office
             property in Washington, DC, for a contract purchase price of $104.5
             million. We incurred $1.7 million of acquisition costs with this
             transaction.


            The execution of new leases for 0.4 million square feet of
             commercial space with an average rental rate increase of 10.6% over
             expiring leases.


2013 Period
            The disposition of the Atrium Building, an 80,000 square foot office
             building, for a contract sales price of $15.8 million, resulting in
             a gain on sale of $3.2 million.


            The execution of new leases for 0.8 million square feet of
             commercial space with an average rental rate increase of 9.7% over
             expiring leases.

Results of Operations
The discussion that follows is based on our consolidated results of operations
for the 2014 and 2013 Quarters and Periods. The ability to compare one period to
another may be significantly affected by acquisitions completed and dispositions
made during those periods. To provide more insight into our operating results,
we divide our discussion into two main sections:
            Consolidated Results of Operations: Overview analysis of results on
             a consolidated basis.


            Net Operating Income: Detailed analysis of same-store and
             non-same-store NOI results by segment.

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