Transcript of

Washington Real Estate Investment Trust (WRE)

Annual Shareholder's Meeting 2011

May 17, 2011

 

 

Participants

John P. McDaniel, Independent Chairman of the Board

George F. McKenzie, President and Chief Executive Officer

William T. Camp, Executive Vice President and Chief Financial Officer

Laura M. Franklin, Executive Vice President of Accounting and Administration and Corporate Secretary

James B. Cederdahl, Managing Director of Property Management

Michael S. Paukstitus, Senior Vice President of Real Estate

Tomas C. Morey, Senior Vice President and General Counsel

Thomas L. Regnell, Senior Vice President of Acquisitions

Edmund B. Cronin, Jr., past Chairman and Chief Executive Officer

William G. Byrnes, Independent Member of the Board of Trustees

Edward S. Civera, Independent Member of the Board of Trustees

John M. Derrick, Jr., Independent Member of the Board of Trustees

Charles T. Nason, Independent Member of the Board of Trustees

Thomas Edgie Russell III, Independent Member of the Board of Trustees

Terrence C. Golden, Independent Member of the Board of Trustees

Wendelin A. White, Independent Member of the Board of Trustees

Dante Degidio, Ernst & Young LLP

Heather Rosenberger, Ernst & Young LLP

David Osnos, Counsel to the Board

Erin Fox, Counsel to the Board

Jeff Jordan, Counsel to the Board

James J. Hanks, Special Corporate Governance Counsel

 

Presentation

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Good morning, ladies and gentlemen. It's good to see everyone here this morning. I drove in the parking lot and it was really full and I thought we're going to have an unprecedented large number of shareholders and then I came here and I see, in fact, we do have a great number and we appreciate your coming today and I'll call the meeting to order, to meet in Annual Shareholder's Meeting of the Washington Real Estate Investment Trust. I'm John McDaniel, the Independent Chairman of the Board and I will act as Chairman of this annual meeting. On behalf of the trustees, the officers, and the employees of WRIT, I welcome you to the 2011 Annual Shareholder's Meeting.

 

As you know by reading the materials that were sent out and the annual report, the company is in the process of an ongoing evaluation of its strategic plan. That dialogue is taking place between management and the board members continuously and Skip McKenzie, our CEO, will report later. The objective of that strategic plan is to continually look to improving the quality of our assets and the quality of our earnings as a company.

 

The management team really does welcome the opportunity at the annual meeting to demonstrate our success in execution of that plan, that ongoing plan, and share with you the vision that we an organization have for the future success of the Washington Real Estate Investment Trust.

 

We are in our 51st year, making us, I think, either the oldest or second oldest REIT in the country right after the legislation was passed 51 or 52 years ago and we are in the 49th year of consecutive equal or increasing dividends and that's something that we're very proud of as an organization and look to continue as best we can.

 

Bottom line of all that is the Board really does congratulate of those who have helped in making this company a true success; the employees, we start with the employees, certainly the officers, and fellow board members as well as you, the shareholders, who own the company. Those of you in the room today are to be congratulated for your continued support and service.

 

Now, we have a lot to accomplish today. It's a little bit complex, so I'd like to get started. We'll be conducting the meeting and the voting part of the meeting in two separate parts. And let me explain how that comes about.

 

The reason we are conducting the voting in two parts is basically as follows: One of the proposals that you had received in your proxy was that we are voting and that is Proposal #3. We're voting on Proposal 3, among others, which calls for the elimination of the 70% super majority voting requirement that has been in the company's existence for many, many years. WRIT's Board of Trustees over time has recommendation the elimination of this 70% super majority voting requirement as one of the components of our ongoing board governance improvement and modernization project, which was undertaken by the Board and is continuing to be enhanced by the trustees over this year. So as you look at many of the proposals that were reflected in the proxy statement, you'll see the theme of upgrading and improving our governance of the organization. ISS which is Institutional Shareholder Services as well as Glass Lewis which are nationally recognized independent governance consultants consider super majority voting requirements like our 70% requirement to be disadvantageous, disadvantageous to shareholders principally because they require an extraordinarily high shareholder vote to change the Declaration of Trust.

 

So when Proposal 3 is passed this morning and, hopefully it will be passed, this will allow us to file the required articles of amendment with the State of Maryland Department of Assessments and Taxation which will cause amendment to take effect immediately, and WRIT will no longer, effective immediately, have the 70% super majority vote requirement in its Declaration of Trust.

 

After the amendment takes effect the shareholders here today, represented in person or by proxy, at this meeting will be able to vote upon and hopefully approve proposal 6, again, which calls for the authorization of preferred shares by majority of vote to be cast on the matter.

 

So we somewhat apologize for the complexity of all of these and ask for your patience as we walk our way through these proceedings today.

 

So with that, I would now like to recognize Laura Franklin, and basically ask Ms. Franklin who is our Executive Vice President and Corporate Secretary to serve as secretary for this meeting and I have asked Laura to introduce the voting matters in a bit more detail, item by item, and conduct the actual vote today.

 

So, Laura, would you please come forward and commence with the voting process for part one of the meeting today. Thank you.

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

Thank you, John. Good morning. I have a lot of work in front of me so we should get started. Thanks, John.

 

On or about April 1, 2011, notice of the annual meeting of shareholders together with the proxy statement, the company's annual report to shareholders, and the form of proxy were sent and made available to shareholders at the close of business on March 14, 2011. The notice called this meeting for 11 a.m. local time on Tuesday, May 17, 2011, here at this location. The Board of Trustees has appointed Computershare to act as the inspector of elections for today's meeting for the purpose of tabulating the votes cast at this meeting. Please also note that rules of conduct for the meeting are available at the voting table in the lobby.

 

As of the close of business on March 14, 2011, the record date for this meeting, there were 65,906,417 common shares outstanding and entitled to vote at this meeting. The presence in person or by proxy of a majority of all the votes entitled to be cast on any matter constitutes a quorum. The inspector of elections has informed me that at least 91% of the outstanding shares are represented at this meeting, either in person or by proxy, and, therefore, a quorum is present.

 

As John mentioned, today's voting will occur in two separate parts. In the first part of voting, we will vote on all proposals included in your proxy statement other than Proposal 6. In the second part of voting, we will vote separately on Proposal 6.

 

Now, I'll present the matters that will be voted upon in part one of today's voting.

 

Proposal 1 is the election of three Class 3 trustees to the company's Board of Trustees, each to serve until the 2014 annual meeting of shareholders and until his or her successor is duly elected and qualified. As set forth in the proxy statement, the three individuals nominated by the Board of Trustees for election as Class 3 trustees are Ed S. Civera, Terry Golden, and Wendy White.

 

Proposal 2 calls for the ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the 2011 fiscal year.

 

Proposal 3, as mentioned earlier, is to amend the company's Declaration of Trust to change the current 70% super majority vote requirement to amend certain sections of the Declaration of Trust to a majority of the votes entitled to be cast on the matter.

 

Proposal 4 is to amend the company's Declaration of Trust to change the vote requirement to elect trustees to a majority of the votes cast.

 

Proposal 5 is to amend the company's Declaration of Trust to update and modernize certain governance and other provisions of our Declaration of Trust.

 

Proposal 7 is to approve by advisory and nonbinding vote the company's executive compensation.

 

And Proposal 8 is to approve by advisory and nonbinding votes the frequency of futures votes on the company's executive compensation. The options presented to shareholders are one year, two years, or three years on Proposal 8.

 

Before the company's shareholder vote on Proposals 1, 2, 3, 4, 5, 7, and 8, each as described in the proxy statement, we want to take a moment and ask whether there is any discussion on these proposals.

 

Okay. I don't see any questions. We'll continue.

 

I now call for the vote on Proposals 1, 2, 3, 4, 5, 7, and 8, each as described in the proxy statement. All persons acting as proxies or shareholders who have not already voted should deliver their written proxies or ballots to the inspector of elections at the table in the lobby. Any shareholder whose proxy has been previously submitted to the Corporate Secretary and who wishes to revoke such proxy may do so by voting in person during this meeting. Shareholders who have voted by proxy need not cast ballots in the voting today unless they wish to change the vote on their proxies. If you wish to vote in person or want to change your vote, please raise your hand and you will be given a ballot. Please indicate the number of shares that you own and whether you've previously submitted a proxy to the company. The polls are now open and we will hold the polls open for 10 minutes while we conduct other business. So, if you need a ballot, feel free to raise your hand and someone will come around and give you a ballot.

 

Okay. I'm going to make a few statements on forward-looking statements that are required before our presentation today but feel free to raise your hand if you've not received a ballot and would like one.

 

Before we commence the presentation portion of our meeting, I'd like to read our standard non-GAAP financial measure disclosure and forward-looking statement language that we read before all investor presentations. Our presentations today will contain certain financial measures such as core FFO and NOI that are non-GAAP measures and in accordance with regulation G of the Sarbanes Oxley Act, we have provided a reconciliation to these measures in our quarterly supplemental materials on our website at www.writ.com. The per share information being discussed is reported on a fully diluted share basis.

 

Please bear in mind that certain statements during today's presentation are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such risks, uncertainties, and other factors include, but are not limited to, the potential for federal government budget reductions, changes in general and local economic and real estate market conditions, the timing and pricing of lease transactions, the effect of the current credit and financial markets, the availability and cost of capital, fluctuations in interest rates, tenants' financial conditions, levels of competition, the effect of government regulations, the impact of newly adopted accounting principles, and other risks and uncertainties detailed from time to time in our filings with the SEC including our 2010 Form 10-K. We assume no obligation to update or supplement our forward-looking statements that become untrue because of subsequent events.

 

Okay. That concludes my business for now. The polls are still open and I will turn it back over to John.

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Thanks, Laura. While the voting is underway, I'd like to take this opportunity to introduce you to our independent members of the Board of Trustees. But before I do, I'd like to recognize our Past Chairman and CEO, Ed Cronin. Ed, would you stand and give him a round of applause. Under Ed's leadership, the Trust has thrived and we appreciate all that you've done, Ed, for the company over the many, many years. I think about 15 or more years in that capacity.

 

Let's start and when I introduce the trustee or director, would you please stand.

 

Bill Byrnes, would you stand? Bill is currently the Managing Member of Wolverine Partners which operates a mutual fund research business and Bill has spent 17 years with Alex Brown & Sons, most recently as the Managing Director and Head of the Financial Institution Investment Banking Group and he serves on a number of boards. He is Director of Sizeler Property Investors, which was a REIT owning retail and multifamily properties; La Quinta Corporation, a lodging real estate company; and JDN Realty; and other retail REIT. Bill brings a tremendous amount of capital market and financial experience through his background to the Board as a real estate investment banker. He also brings us significant amount of experience, I might add, from the boards of several other REITs in which he has served in the past.

 

Ed Civera. Ed is currently the Chairman of the Board at Catalyst Health Solutions, a publicly traded PBM, pharmacy benefit management company. He also serves as Chairman of the Board of MedStar Health here in the Baltimore, Washington area. And from 1997 until 2001, Ed was Chief Operating Officer and Co-Chief Executive Officer of United Payors and United Providers, which many of us in the local community knew as UP & UP. And prior to that, Ed had spent 25 years with Coopers and Lybrands. So, he has great deal of REIT experience and also was a very effective selection for the board in terms of his Chief Executive Officer and Chief Financial Officer background experience.

 

John Derrick. He is retired Chairman and Chief Executive Officer of Pepco Holdings, which we just know as PEPCO, John. He is past Chairman of the United States Energy Association, served as Director and Chairman of the Greater Washington Initiative, past Chairman of the Greater Board of Trade, Maryland Chamber of Commerce, and like Ed and John bring a tremendous amount of experience not only as Chief Executive Officer but as having local knowledge of the business community which was developed through decades of experience in this area. John is also Chairman of our Compensation Committee.

 

Tuck Nason. Tuck would you stand? Retired Chairman and Chief Executive Officer of The Acacia Group including Acacia Life, Acacia Federal Savings Bank, and the Calvert Group. Like John, Tuck is also past Chairman and Director of the Greater Washington Board of Trade and he served as a member of MedStars Board for many years, 2001 to 2010. He is a member of the Board of Trustees at Washington and Jefferson College and served as its Chairman from 2007 to 2010.

 

Edgie Russell. Edgie served as President and Chief Executive Officer of Partners Realty Trust from 1990 until his retirement in 2005. Partners Realty Trust was a real estate company based in Baltimore that focused on ownership and operation of apartments, office, and shopping center real estate assets. Edgie currently serves on the Board of Directors of Good Samaritan Hospital, the Keswick Multi-Care Center, and the Robert Packard Center for ALS research at Johns Hopkins.

 

Terry Golden. Terry has been Chairman of Bailey Capital Corporation since 2000, I understand, a private investment company in DC. He has been Chairman, CEO of Host Marriot Corporation, now known as Host Hotels and Resorts. And prior to that time, he was Chief Financial Officer of the Oliver Carr Company; the Head of General Services Administration, GSA; Assistant Secretary of the US Department of Treasury; and was also founding member and partner of Trammell Crow Residential Companies.

 

Wendy White. Wendy is partner at Pillsbury Winthrop Shaw Pittman. She has practiced law there, I believe, since 1981 and she is a founding member of the Pillsbury Managing Board, former member I should say. I'm not sure Wendy if you're founding or former. And she is currently the head of the firm's DC real estate group. Wendy focuses her practice on the acquisition, disposition, and financing of commercial real estate and she has consistently been ranked as a lead real estate attorney... one of the lead real estate attorneys in the District of Columbia. By she is Chairwoman of our Corporate Governance and Nominating Committee. Terry is the chair of the Finance Committee, I should add.

 

And finally, I'll just add a little background to the picture or fill out the picture, I'm a former Chief Executive Officer for 26 years of MedStar Health and had been active on a number of community boards and civic organizations and, currently, a couple of probably of health company boards and basically I'm very proud and pleased to serve as the Independent Board Chairman of this company. So, thank you very much for that privilege.

 

In the room, we want introduce a couple of folks that are very helpful to us as we move along. Dante D'Egidio. I hope I didn't butcher it, Dante. Heather Rosenberger and Yemi Aberra who are representatives, would you please stand, Yemi... she is not here... of Ernst &Young, the auditors that audit our company's books. The audit committee selects the auditors and they are here as the independent registered public accounting firm for the year ending December 31, 2011. And they'll be available through the remainder of the meeting to answer any appropriate questions that you all might have of our auditors.

 

And lastly, I would like to introduce our Counsel to the Board, longstanding counsel to the board, David Osnos, Erin Fox and Jeff Jordan. Is Jeff here? Jeff, thank you for coming. From the same firm who are the company counsel on security matters.

 

And finally, Jim Hanks from Venable. We've worked with Jim... are you here? He is right there. He is... Jim has been working with us as special corporate governance counsel as we walk through a number of matters that we have to deal with today.

 

So, with all that, Laura, have I bought you enough time to close the polls.

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

No. Can you give me 10 minutes?

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Good. That was my marching orders, 10 minutes (laughter). Some of you were short and I added little. I made up some stuff there, Laura.

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

Okay. I've been informed that the polls are officially closed so if you could wait for one minute, the inspector of elections and our general counsel will give me the voting results.

 

I think this is where we're supposed to have music and pictures and... to fill up all the quiet noise.

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Yes, this is suspense.

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

Yes, to the suspense.

 

Okay. Thanks for your patience. I've been informed by the inspector of elections as follows:

 

As to Proposal 1, each of the nominees for election as Class 3 trustee has received the affirmative vote of the holders of more than the majority of the outstanding common shares and, therefore, has been duly elected to serve as a Class 3 trustee until the 2014 annual meeting of shareholders and until his or her successor has been elected and qualified.

 

Proposal 2, ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2011. They received a favorable vote of holders of more than the majority of the outstanding common shares and this proposal has therefore been approved.

 

Proposal 3, the proposal to amend the company's Declaration of Trust to change the current 70% super majority vote requirement to amend certain sections of the Declaration of Trust to a majority of the vote entitled to be cast has received a favorable of vote of the holders of more than 70% of the outstanding common shares entitled to vote at this meeting and, therefore, this proposal has been approved. As described earlier, Articles of Amendment will now be filed with the State Department of Assessments and Taxation of Maryland and if they are accepted for record and become effective during this meeting, we will report that to you.

 

Proposal 4, the proposal to amend the company's Declaration of Trust to change the vote requirement to elect trustees to a majority of the votes cast has received a favorable vote of the holders of more than the majority of the outstanding common shares and, therefore, this proposal has been approved.

 

Proposal 5, the proposal to amend the company's Declaration of Trust to update and modernize certain governance and other provisions of our Declaration of Trust has received a favorable vote of the holders of more than 70% of the outstanding common shares entitled to vote at this meeting and, therefore, this proposal has been approved.

 

Proposal 7, the advisory and nonbinding vote on the company's executive compensation has received a favorable vote of the holders of more than a majority of the outstanding common shares and, therefore, this proposal has been approved.

 

And finally, Proposal 8, the advisory and nonbinding vote on the frequency of future votes on the company's executive compensation. The option of every year has received a favorable vote of the holders of more than a majority of the outstanding common shares. And, therefore, the option of every year will be the recommendation the shareholders with respect to the frequency of future votes on the company's executive compensation.

 

Okay those proposals.

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Thank you, Laura.

 

Now, we'll move in to management's presentation. Skip McKenzie, our President and CEO; and Bill Camp, our Executive Vice President and CFO will now present the management report.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Thank you, John, and welcome, everyone.

 

Before I get started with the management presentation, I'd like to introduce once again the officers of Washington Real Estate Investment Trust. First is Bill Camp, on the podium, the Executive Vice President and CFO. Brad Cederdahl, Brad is our Managing Director of Property Management. Laura Franklin, who you've met earlier, our Executive Vice President in Accounting, Administration and Corporate Secretary, Tom Morey is our Senior Vice President and General Counsel, Mike Paukstitus, Senior Vice President of Real Estate, and Tom Regnell, Senior Vice President of Acquisitions.

 

Okay, as we've done in the last couple of years, I'll give the CEO address and then Bill Camp will do our investor presentation which is the typical presentation that we give when we go on the road and speak to institutions.

 

Okay. In 2010, real estate market fundamentals remained generally lackluster in virtually all commercial property sectors. While Washington arguably demonstrated the best performance of any market in the country, it was far from the dynamic real estate environment we have come to enjoy and expect in this region for the past 20 years. While conditions were not bad, I would hardly characterize them as robust. And what not for extraordinary leasing by the Federal Government in the District of Columbia, it could have been much worse as private business owners largely continued to sit on the sidelines with their leasing needs, double and triple checking that the worst of the recession is behind us.

 

At WRIT, we are beginning to see signs that real estate fundamentals and leasing activity are picking up throughout all our sectors but progress is slower than we'd like and I expect the recovery to be a slow multiyear return back to more normal occupancy in all our commercial sectors.

 

In contrast to the lackluster performance in commercial fundamentals, there are two specific areas in our real estate world where activity is strong and, in many respects, as good as it gets. The first is multifamily operating fundamentals. The recovering occupancy and rental rates increased steadily in 2010 and are now at levels we have not seen since the tech boom of the late '90s and early 2000s. Given the lack of any material new construction over the past three years in our region, I expect this trend to continue throughout 2011 and beyond in apartment communities region wide.

 

The secondary area where activity is hot is investments sales in all our sectors as institutional investment capital races to invest in what many consider the best market in the country in anticipation of improving market conditions in 2011 and beyond. This activity ramps up in earnest in the early fall of 2010 as sellers rapidly gained confidence in an active and liquid selling environment and the market experienced a steady flow of increased property offerings with rapidly rising prices for quality assets resulting in a sellers market by the end of the fourth quarter.

 

So how has WRIT performed in these challenging conditions in 2010? I am glad to report to you that our portfolio continued to exhibit its resilience and our people and properties performed well in this very challenging environment.

 

On the operating side, the average physical occupancy of the WRIT portfolio was 89% and in our commercial portfolio, we executed 1.6 million square feet of new leases at an average increase in rental income of 13%. Our strongest performing sectors were multifamily and medical office followed by the office and retail sectors. The weakest performer by a wide margin continues to be our industrial/flex sector where we encountered declining occupancies and falling market rents. Our superstar was our multifamily sector where occupancy for the year was 96% and same store revenues increased 2.7% over the prior calendar year in 2009.

 

On the acquisition and disposition of the equation, we were very active as we continue to push forward with our strategy of recycling capital and reinvesting and focusing our investments inside the Beltway, near major transportation nodes, or in areas with strong employment drivers such as BRAC relocation facilities. In February, we acquired two recently constructed 100% leased office buildings in the Quantico Corporate Center, a 271,000 square foot office park for $68 million. In December, we acquired Columbia Overlook, a 90% leased class A shopping center in Columbia, Maryland for $88 million. Just after year end, on January 11^th, we acquired 1140 Connecticut Avenue, a 184,000 square foot office building in the heart of the Washington CBD for $80 million, and this past March, 1227 25th Street, a $47 million, a 137,000 square foot, 72% leased value-added acquisition located in the West end submarket of Washington, DC proximate to several other WRIT assets in that area.

 

On the disposition side, we sold a 229,000 square foot portfolio of four properties on Parklawn Drive in Rockville, Maryland for $23.4 million. We also sold the Ridges Office Building at Gaithersburg, Maryland for $27.5 million and we sold the three-building industrial portfolio in Beltsville, Maryland for $23 million. Collectively, these dispositions generated a gain on sale of over $21 million.

 

Taken together, we think these transactions significantly improved the quality of our portfolio, enhanced and added stability to our cash flow, and reduce our exposure to volatility generated by cyclical downturns.

 

With respect to our financial and capital market activities, WRIT had a very busy year as we continue to improve our balance sheet and position the company with the financial stability and flexibility to meet the opportunities and challenges in the months and years ahead.

 

The hallmark of our long-term success has been our conservative financial posture and 2010 was a continuation of this legacy. During the year, we raised $171 million of equity throughout the year with our ATM program with the Bank of New York and raised $215 million of long-term debt at a coupon rate of 4.95% through a public bond offering in September. For a 10-year paper, this is the lowest coupon that we've ever had and we think that shows the great achievement for the WRIT enterprise through its wider and greater acceptance in the debt capital markets.

 

We used $193 million of this capital to repurchase debt obligations scheduled to mature in 2011 and the balance to purchase the acquisitions that I mentioned earlier.

 

The dividend has always been a large part of the WRIT story since our founding 50 years ago. In 2010, we paid our 193rd, 194th, 195th, and 196th dividend of equal or increasing amounts, a track record matched by no other REIT. And in fact, a recent research group reported that only 11 public companies in the entire US public company universe can boast of better track records than this.

 

The WRIT stock price also had a good year in 2010. The total return for the WRIT stock in 2010 was 19.2%. And those of you who followed the famous chart on the back of the annual report have already noted that the $10,000 investment made on December 31, 1971 was worth $3,355,680 at year end.

 

Looking forward, I believe 2010 will be a very active and exciting period for Washington Real Estate Investment Trust. This year to date, in addition to the $127 million of downtown assets I mentioned in my earlier comments, we announced that WRIT is under agreement to purchase a 220,000 square foot office building located at one of the four metro stops in Tysons Corner, Virginia for $73.5 million. This property is the corporate headquarters of Booz Allen Hamilton and this site has significant opportunity to increase density considerably in the future upon redevelopment. In addition, we are working on a number of other excellent opportunities we expect to be reporting to you soon. We have a good pipeline with some great potential investments.

 

At our first quarter conference call this year, we announced we would be placing our industrial portfolio on the market with our current expectation to exit the sector before year end. While it is still early in the process, I have nothing definitive to report to you, but I believe this potential transaction, if it is completed as we envision, will be a transformative event for our company. Preliminary interests by buyers has been strong and out intention is to redeploy the proceeds from this transaction into new acquisitions in our other four sectors in assets of higher quality earning streams and better growth potential over the long term.

 

On the operating side, as I stated earlier, we are seeing increased leasing activity across our portfolio and as the year goes on, I expect we will begin to see more opportunities to increase rent as new construction of competing properties in all our sectors has been held in check for the past three years.

 

In summary, I believe the worst of the financial crisis is behind us. And although the future is not without risks, it is a bright one for WRIT and the Washington region.

 

Before I finish up, I'd like to mention one additional accomplishment that WRIT chalked up in 2010. Early in the year as part of the celebration of our 50th year in the business, WRIT was given the opportunity to ring the closing bell on the New York Stock Exchange and for one afternoon, in January 2010, a large flag bearing the WRIT logo was proudly hanging in front of the world's most prestigious stock exchanges. I've been here at WRIT for 15 years and, in that time, I have to say it is one of my proudest moments at the company. We are a great institution and many of you have been WRIT shareholders for decades knew this before the rest of us did. But seeing the WRIT flag flying in front of the stock exchange tells the rest of the world who we are and I'm incredibly proud of that moment in our history which occurred this past year.

 

In closing, I'd like to thank the Board of Trustees for the wisdom and guidance, our employees for their continued dedication and hard work, and you, our shareholders, for your continued trust and support. Thank you all for attending this morning and your continued interest in WRIT.

 

Now, I'd like to pass the baton off to Bill who, as I said earlier, will do our presentation that we did throughout the year at WRIT conferences and to tour of the institutional community. Bill?

 

William T. Camp - Washington Real Estate Investment Trust - Executive Vice President and Chief Financial Officer

Thanks, Skip.

 

We'll see how this works. I'm going try not to stand behind the podium but, you never know, I might hide behind it in a few minutes.

 

As we look forward, we are focused on our strategy, a strategy that we set out many... really five years ago but we've really formalized it last December at a board retreat. Our trustees and management worked together to come up with a strategy that is really how we're really looking at our portfolio and how we're going to grow in the future.

 

We're focused on the Washington DC market. We're the only REIT focused solely on this market. If you look at this market and some of the statistics that I'll show you later in the presentation, this market is one of the strongest in the world. It's one of two markets in the United States that most investors want to put money into and we want to focus on that market solely because we think it's got long term growth prospects.

 

Our portfolio is positioned with a diversified strategy of only five different property types, soon to be four as we sell off the industrial and flex property that Skip mentioned. But we're really concentrating on office, medical office, retail, and apartment buildings. Those four sectors are key to this market and the reason we can do this strategy in this market is driven by a lot of different factors that I'll go through throughout this presentation. But it's those four property types that add stability into the portfolio. The cash flows that we derive from these four property types and five with the industrial property, if you really look at the cash flows, the occupancy levels, and everything that goes around owning those sectors, it really adds to the stability of the cash flows which allows us to pay the 50 years in dividend that we've been doing.

 

If we look at how we manage the company in terms of the financial structure, the capital markets have been very favorable to us but part of it is the way we manage the company and having a conservative balance sheet, being able to access the markets when we need to to pay our obligations and really to fuel the growth of the future of the company through acquisitions and development.

 

And then if you look at the wide, you know, the actively maintained disciplined acquisition and disposition strategy, which is really a key to what we're going forward, is we don't want to always be a buyer of properties in the marketplace. You want to be actually actively trading your properties in the marketplace because sometimes you pick a property, you own it for a while, and the demographics of the neighborhood change or the building for whatever reason isn't performing the way you thought it was going to originally. You don't want to own that asset forever. You want to be able to recycle that asset into things that grow much quicker in the future. So we're going to be more active doing that and when you look at it for the last five years, it's really been a part of who we are.

 

Lastly, as Skip mentioned, the dividend is very important along with our returns to our shareholders. There is no one else out there, no other REIT that you can invest in that has a 49-year track record in dividends like we have. And quite honestly, I think that chart at the back of the annual report is pretty impressive.

 

Who are we? We are the oldest REIT. As I mentioned, we were formed in 1960 about a month and a half to two months after the REIT Act was passed by Congress and then our mission from that point forward, and it's still is, is to basically deliver you consistent steady flow of income and a growing cash flow so the share price goes up. That's the goal. The goal is to get you a return on your investment.

 

We own 86 properties only in this market, spread out over the property types that I mentioned earlier.

 

I already mentioned the longest track record of dividends and Skip mentioned the 11 other companies that are out there that have longer track record. It's pretty impressive when you think there are several thousands, tens of thousands of public companies there that pass through the world over the last 50 years and even longer.

 

We look at our operating philosophy and look at our capital structure. We run a capital structure that affords us a high BBB+ and Baa1 rating from the rating agencies which are the two independent guys that look at your debt and say, you know, how safe is it to invest in a debt of the security. Does everyone know that the Federal Government is a AAA, so it goes down from there, AAA, AA, A, and then it goes into the B, BBB+. We are one of about 10 REITS that have the rating at our level or higher. There are only a few REITs that are in the A category and there is no REIT in the AA category. So it's really a testament and just to give everybody an idea, there is only about 120 public REITs, 127 public REITs out there. So when you really look at the portfolio and how we're running it and then you think about how our ratings in the independent rating agency look at us. It is quite high and we rank very high among those companies in terms of the debt structure that we run, which gives us a lot of flexibility to manage our company.

 

If you look at the footprint of properties, you'll see that we only do business in Washington DC, there's a reason for it. Washington DC is ranked one of the top two investment regions in the country, if not one of the top five almost all of the time in the world. New York and Washington DC are the only two markets that people want to put money into in terms of institutionally investing in the real estate market. So those are good reasons to be here.

 

When you look at the DC metro area versus the rest of the nation, we maintain one of the lowest unemployment rates throughout the real estate cycle, through all the economic cycle. We always maintain a band below the rest of the country which gives a lot of stability in our earning strength.

 

And when you look at Washington DC and you think about all the different REIT opportunities you have to invest in, we are the only one that focuses all our properties on this market. There are really good reasons for that. Washington DC is unique among the county. There are over 3000 counties in the United States. We have four of the top five wealthiest counties in this area. It gives people spending power. It gives people buying power. It gives people jobs. It gives people a lot of things and it gives us, as real estate owners, the benefit of enjoying cash flow from those people that can pay rent.

 

Businesses want to locate here. There are a lot of reasons for it. We have the top five most highly educated areas in the country. It is a huge statistic that mostly most investors don't know and because of that this drives our market. Well why is that? Well, the anchor is the Federal Government. I'm not going to say, it's a big growth engine but it adds a tremendous amount of stability. It is the reason that we've been able to be successful in this market. It is a stabilizing force in this market that allows us to invest in multiple different property types and be successful in all of them.

 

When you look at Washington DC and the Federal Government, everyone questions, well, what happens when they cut the budget. Well, that's a great question. It's a question we take all the time. What happens if they cut the budget? Well, they balance the budget one time back in the early part... I'm actually trying this, it's right here. Back in '95 and '96, Newt Gingrich was the Speaker of the House, President Clinton was in charge, they actually threatened to shut down the government, they actually succeeded in shutting down the government for a period of time. They cut back the budget. They actually balanced the budget. There were threats of balance budget amendments. There were all kinds of things. Well, if you look at that chart from that point, it went flat for one year. This is in the Washington DC area. It is not full government spending. The full government spending can come down. I'm not questioning that. Hopefully for all of us in this room, it does come down. But in the DC area, it has consistently grown.

 

While we can't predict what the future is going to be but as you read the newspapers and you see the back and forth that might be happening in Congress, in the White House, and various other things, it's very hard to say that it is going to turn back anytime soon. And the reason is that every time there has been a crisis in the United States, whether it's 9/11, you can go back... you can even go back prior to 1983. Any time you look at these crisis periods, and the most recent one being the financial meltdown, the spending in the Washington DC area actually increases. The reason is that the government feels like they need to get involved in things.

 

So, what do we have going forward? Well, we have three things that I want to point out that are probably catalysts for future growth. The first is in our region, not everywhere in the country, but in our region. First is the BRAC relocation and the military base closings throughout the country. We're the beneficiary of that. We have employees from other parts of the country coming into the bases whether it's Fort Mead or Fort Belvoir, even Aberdeen up north in Baltimore, down to Quantico where we purchased properties, all of those bases are beneficiaries. There are going to be more federal dollars going to employment in those areas than there were last year. It is going to be hard to reverse that. They're already building all the buildings. We read about the traffic problems that are coming and all these things.

 

Next is there's a healthcare spending bill out there. We don't know what the end result of that healthcare spending is really going to look like in the end. It might change. But I don't think it's going to go to zero. I don't think it's going to go away. I think there's going to be some bill that's a compromise from something that's already passed and we're going to see a staffing level to support that bill after the fact and that's going to increase employment. We've got all the healthcare professionals right here in Washington DC that are working on this bill that are going to come up with something and somebody is going to have to administer the thing

 

And last is there's going to be all kinds of new financial reforms. It seems like it is getting less and less everyday as they kind of back track on some things. But that bill hasn't really been formulated either. And that is going to be a piece of the Treasury Department or a piece of the Federal Reserve or a piece of the SEC. Something is going to grow.

 

So we don't really think that and we tell investors many times that we don't really think that things are going to bend back anytime too soon. It might flatten out and for many of our own personal situations, we probably hope it does, but we don't see it bending back right away.

 

The strategic plan, I mentioned it earlier, and I want to go through kind of what we're talking about. The strategic plan is very simple. We're locating assets in the best submarkets in the Washington DC area. We want to own inside the Beltway. We want to own near metro stops or other major transportation nodes. We want to own near major employment facilities, maybe at the hospital, maybe at the BRAC facility, and we want to own properties that are in good demographic regions where the people that live in those regions can afford to buy.

 

We also want to look at funding up some of the acquisitions that we're going do in the futures with dispositions. Why is that? Well, some of our properties aren't in those locations. And you know those locations do change over time. When you're a long term owner of assets, sometimes those neighborhoods change. So we want to make sure that we're constantly evaluating our portfolio and looking at what we're overdoing and how we can fund some of the future growth, it's through what we already have instead of raising more money through the capital markets.

 

Exploring the sale of the industrial and flex, Skip mentioned that. The big piece of what we're doing in this particular year, we will take those proceeds and redeploy them through the other four property types. Many of the investors that we talked to over time are somewhat concerned that we won't be able to get the same kind of revenue off the new assets as the ones that we're selling. Cap rates are an interesting concept but rate rates are basically the yield that you get off a building. If you're going to buy a building for a $100 and the cap rate is 10%, you get $10 of revenue every year. Well they're worried that the $10 of revenue will be replaced by something and it's $6 of revenue and that historically has not been the case and I'll show you a couple of examples as we go forward.

 

We are refining the diversified holdings. We're looking for higher quality buildings, not just trading buildings for trading sake and putting them in the right submarkets but really knowing the submarkets is part of our hallmark. We all work and operate in this market. All 300 of our employees all live and breathe this market. It's not like another REIT where you might find somebody that has properties in Washington, New York, Boston, DC, in Seattle, and San Francisco, you pick whatever cities you want. But the senior management teams of those companies can't possible know their markets, all those markets as well as we know this one. So we know not only what submarket we want to be in but we know what corner on the intersection of the submarket that we want to be in. We know the traffic patterns. We know how it all works. So we know which buildings we want to own versus the competition and that those are the buildings that we're focused on.

 

So when we look at each of the property types as we redeploy the assets from the industrial sale, let me just walk through real quickly. In the office, we're looking at exactly what I said earlier, inside the Beltway, near metro stops, near major employment drivers.

 

In multifamily, Skip mentioned how red hot multifamily is right now. It's very expensive to buy multifamily. And because there has not been anything built in the last several years, if there's a great opportunity or we think there is a pretty good opportunity, we'll potentially put a shovel on the ground and build new multifamily in this market in the future.

 

Medical office, it's an acquisition and a redevelopment type thing and a development thing. We want to own medical office near the hospitals. That's where the doctors want to be, that's where the patients want to go when they're sick, that's where everyone seems to focus in, and those are the buildings that have the best returns. We may do that through acquisitions or development.

 

And retail really is an acquisition and a redevelopment. We have some retail that we may redo, we may knock down and rebuild.

 

So those are the things that we're looking at.

 

These are the recent acquisitions. I'll just walk through really quick. Skip mentioned all of these. These are the two buildings down in Quantico. This is Gateway Overlook; Gateway is a retail up in Columbia. The downtown building on Connecticut Avenue that we just purchased in January, 1227 25^th Street, and then this is the one that we have under contract, John Marshall II out of Tysons Corner.

 

What did we get rid of? We sold the Parklawn portfolio on Rockville, Ammendale and Amvax on Beltsville. We sold our Dulles Station West Phase I which is down at Herndon on the Toll Road, and then we sold The Ridges Building up in Gaithersburg.

 

So the strategy has been in place for a while. We articulated it better in December through our board retreat, but really if you look at the shift of what we're been doing since 2005 till now, we've had the strategy in place. We are shifting more of our assets inside the Beltway, more of our revenue, more of net operating income is coming from inside the Beltway, and if you think of this piece, there's a big part of the portfolio that never will be inside the Beltway. Most of the hospitals are outside the Beltway so your medical office buildings, you probably won't like it as much if we have all our medical office buildings inside the Beltway. Our retail, you probably won't like it if all our retail was inside the Beltway either because a lot of the affluent people that buy things in the grocery store are located outside the Beltway and we want to be as close as we can to those people. So there are a lot of things. And then most of the industrial assets that we're selling off are outside of the Beltway. So you really want to realize that this shift is never going to be 100% inside the Beltway. That's not the focus. The focus is that we make sure it is in the best areas that we can get it.

 

So the shift here, if you remember the demographics, if I go back a couple of slides to this chart, if you really draw a line straight down the middle of DC, the most affluent areas are as everyone in this room knows are right here, right in Montgomery, Howard, Loudoun, and Fairfax. Those are the areas you want to try and focus on and if you look at the map of our assets which I showed earlier and I'm not going go back there but if you showed those again, you'll see that the shift is on. If you look at this pie, we moved inside the Beltway, inside DC, increased. We've taken Virginia, basically held it the same but we've moved some of those assets inside the Beltway. And then Maryland, Maryland we had some assets that were not necessarily in those affluent areas and we moved some of those assets and redeployed the capital in better locations. In the process, we've grown our net operating income from $132 million to $208 million. So it's been not only a shift in the pie but the size of the pie got bigger.

 

Well, how did we do this? Well, it's very simple. These are all the buildings we've bought. This is a medical office near a hospital. This is an apartment building on Connecticut Avenue. This is a downtown office building. This is near the hospital. This is Quantico right by a BRAC facility. This is Gateway up in Columbia. Very... you know Howard County is a very affluent area. It's also near a BRAC facility with Fort Mead and the population growth. And then you have the two assets downtown.

 

Everything that we sold is outside the Beltway, suburban, not near a metro. Just... there's really less growth in those assets.

 

So the strategy has been working for several years and it's added stability into our portfolio. If you look at this, this is occupancy. So you see multifamilies, as Skip said, it's very high, 96% occupied, very steady through the downturn. All the other sectors, with the exception of industrial, have been very solidly performing. So well, obviously, it shows on the industrial, we analyzed it very closely over several real estate cycles and decided it was the right thing to do to sell that asset class or at least try to sell that asset class, I should say.

 

The highlights in 2010. The big ones are steady, steady net operating income. Core funds from operation, $1.96, again, pretty steady through a downturn, one of the worst economic recessions that we've seen in our lifetimes. Core funds available for distribution, this is kind of the number that we look at to pay... help pay our dividend and then obviously the dividend numbers.

 

We recycled... we purchased $156 million and we sold $74 million. We've been telling investors that we are going to try and sell about a third of what we buy. So, we'll continue to grow but about a third of what however much we grow will be paid for by existing assets and that recycling hopefully into better assets with better growth will drive earnings growth into the future.

 

As I mentioned, steady is the operative word here. We went through a very tough time and during that tough time, we continued to grow on a dollar basis our net operating income.

 

And we're mindful of expenses. If you look at our... not only... this is general and administrative expense, but if you look at our operating expenses over the last few years, we've been very cost conscious and driving our operating expenses down. But our general and administrative are really things that we can control; that's the controllable expenses and we run significantly below where all those other REITs that I said you can invest in. The average of all those other REITs, you can see how far below we operate on in terms of a percentage of our revenue stream.

 

And we run that conservative balance sheet. There's a reason for it. I don't want to get stuck out here by having a big stack of... a big stack of debt coming due in any one year. We have the yellow, which is my line of credit. I'm in the process of redoing that right now. That will be taken cared of and... or should be taken cared of or I'm in big trouble.

 

And then if you look at the rest of the debt, it's really manageable. I mean it's less than $100 million... basically less than $200 million almost throughout until we get passed out after 2019. So if the interest rates start rising, which is in the talk of the day, interest rates might rise, we really don't have any variable rate. Any interest rates fluctuation really won't hurt our company at this point in time. We have only $60 million that can change with a rising interest rate stream. Obviously, we will have some refinancing that we have to do but I'm not too concerned about that. Skip mentioned, last year we issued the 4.95% on cost of debt that we issued in September and if you try and do that again today, we'd actually be lower. The current market is actually a better interest rate than that in today's market. So there's opportunity instead of interest rates arising, they actually fell a little bit in the last six months.

 

Lastly, two slides on our dividend. One, you can see the string of increasing dividends and how it is covered by our FFO. How much FFO we generate, how much dividend we pay. And you can see at times it gets tight. If you go back in time for the first 35 or so years of our existence, we paid out 100% of our FFO and then we shifted to a policy of basically getting about 100% of AFFO or Adjusted Funds from Operation. And that's really the money that's left over to pay the dividends and we've been running about 100% for the better part of 15 years and we're currently about that level right now.

 

And if you look at what happened over the last couple of years, during this period of time, Skip and I went out on the road to talk to many of our institutional investors and if you remember back then, you probably own more than Washington Real Estate Investment Trust in your portfolio and there is probably other REITs that you own that actually decided to cut their dividend. They reduced their dividend. They lowered your income stream. We chose not to do that. Because of that our... what's called the payout ratio is how much money do you have to pay the dividend versus how much dividend are you paying. Our payout ratio actually went north of 100% for a period of time.

 

That's not necessarily a sustainable business model. So what we're trying to do is bring that back down to 100% and lower it even a little bit lower than that, getting to the 90% or 85% over the next several years. And in doing so, that provides you much more stability in your income stream. It gives you much more protection as a dividend and a stockholder in terms of that future dividend. So we will continue to work on that, but the interesting part for me is everyone cut their dividend and lowered their payout ratio to basically 80% on average and they've all had to kind of trickle it back up as things start coming back around in the economy and now we're pretty much where everybody else is and all the questions that we took about our dividend and why we didn't cut our dividend. Well, we didn't cut it because of you, the shareholders. We didn't think it was the right thing to do. The board didn't think it was the right thing to do at the time. Obviously, they have the final say in the matter and we all collectively thought that it was the right thing to do and hang on to our dividend throughout this downturn and it's proven to be a good strategy and now everyone is back up. We don't take any more questions really about the dividend and all that much. It's something that we watch and something that we're managing in our strategy, but is not necessarily the thing that anyone is losing any sleep over right at this point in time.

 

With that, I have to show these next couple of slides for my legal community. They need to see these. These are just reconciliations if anyone has any questions on all the numbers, I'd be happy to answer them after the meeting and we'll go through the details and I'm not going to have you memorize this and there will be no quiz at the end.

 

With that, I'm going to turn it back over to Skip for Q&A.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay. This is the time for the meeting where you get to fire the questions away at management. So the floor is open if anybody has a question about anything that is presented or anything on your mind relating to Washington REIT.

 

Yes, sir, in the back of the room.

 

Dale May – Shareholder

I'm Dale May a shareholder. I was wondering of the sector up for sale. What are some examples of the industrial activities involved and what's the meaning of flex?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay. When you say examples, you mean property examples or...?

 

Dale May – Shareholder

The types of investor activities.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay. Okay. Type of tenants?

 

Dale May – Shareholder

Just some examples. Yeah.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

I'm more than happy to do that. Because we think when we get the question of the type of our properties because... asked this question frequently about... we don't have what is known as true industrial. We, in Washington, there aren't a lot of manufacturing facility. So we don't have high bay industrial properties, the 30-foot clear warehouse like the big industrial REITs (ph) have. We have primarily two categories of what we call industrial. It's a little bit of a misnomer to be honest with you. We own some smaller bay we call industrial properties primarily down in the Springfield I-395 corridor. There are 5000 to 20,000 square foot tenants, very heavily weighted towards like home improvement contractors and we have a million guys that are doing flooring and marble countertops and we actually even have a guy there that grows fish for Wal-Mart. So merely different uses, they're very negatively affected during downturn in housing and that was one of the reasons that sort of part of our industrial portfolio was hurt.

 

The second part of it, we own a number of flex buildings and you ask what do we mean when we say flex? Flex is another misnomer in my opinion. Flex is highly inflexible. Flex buildings can be one-storey office buildings almost, they can have assembly, often times they're like the high tech users, assemble radars and things like that and most of our what we called flex buildings are out in Chantilly area. There is a proliferation of those type of buildings built, a lot of DOD oriented people, Northrop Grumman or Raytheon or some of the big L3 communications we have at least with a fairly largely lease and those particular users were hurt just because of oversupply of the office market. They tend to oftentimes compete with office buildings and so that was affected negatively but for a little bit different reasons.

 

Dale May – Shareholder

Yes. Thank you, sir.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Good question. Yes, sir?

 

Male Participant 1

(inaudible) are there any reasons to believe that the real (inaudible) structure itself might be better if (inaudible)

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

I don't believe so. I have never heard that brought up. I have asked... actually, I had that question I've asked recently at Nayarit (ph) and they don't... I've never heard anybody suggested that that was a question and we're referring to as our tax harbor so to speak. Never heard that mentioned.

 

Yes, sir, in the back corner of the room?

 

Male Participant 2

How are you positioning yourself for the Metro Rail expansion? Because we're going (inaudible) you said you're pulling a lot of the stuff into the side of Beltway but obviously, I'm not sure it's going out, so how are you going to position yourself to take advantage of that?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Sure. Excellent question. Question was how are we positioning for the new Metro occasions. Well, one of the big acquisitions that we mentioned, that John Marshall II buildings, which is the Booz Allen headquarters is 500 feet from the Metro location in Tysons Corner. I think it's the Tyson Central 7 location. It's the one just beyond the intersection of 123 and Route 7. That building is perfectly situated to take advantage to the Metro's expansion. The problem with Tysons Corner right now is it's a terrible market but... so it's very difficult to own buildings in Tysons. So what you want is to have a building that's going to get you through this construction period and then be available for leasing upon its completion. So that building in particular is leased to Booz Allen Hamilton through 2016. The construction is scheduled to be completed in 2013 and we all know that these projects sometimes take longer. They never announce that it's off schedule but even if it's off the year, we have lease coverage in that building through 2016. And then as I mentioned in my opening comments, there is a lot of density we could add to that site at a future point in time. It's obviously not on our radar today, but that's one good example of how we're positioning ourselves for that Metro Rail expansion.

 

We also out in the Tysons Corner Avenue have our biggest square footage office building which is called 7900 West Park. That's the building that we have a number of different... we're looking at a number of different renovation scenarios over time. We're not going to do it now because it doesn't make economic sense to do it now but we're looking at things such as re-skinning the building, et cetera.

 

We also have upon completion of the second phase of the Metro, which is not funded yet, you know, we still have a large site out on the Dulles Toll Road area where we could build a 340,000 square foot office building. Now, you wouldn't build that until that second phase is completed.

 

So those are some of the things we're working on right now. Obviously, we're continuing to look at other opportunities on that but we do think over a period of time, Metro has proven to be a transformative event. If you looked at the Boston area 25 or 30 years ago, it was really a crummy real estate market, but with the advent of what Metro has done to that, it's probably the best market and I think that you can expect to see similar type transformation in the Tysons market when that's in place.

 

Next question?

 

Yes, sir, in the corner.

 

Male Participant 3

I have two questions. First question has to do with the sale of the industrial/flex. Are you expecting to take a loss when that... when those properties are divested? And if so, what kind of magnitude? That's the first question. The second question is are you considering any type of entrée into that White Flint development that was supposed to be taking place over the next 10 to 20 years?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay. The first question is, you know, what our sort of thoughts are or expectations at least on the industrial portfolio? And then the second thing is White Flint. Okay. With regards to our... we're not announcing what we think the portfolio is going to sell for, but I would say generally on the aggregate basis, there will be a significant gain. I mean, you know, in the aggregate; some properties that will look more, some properties a little bit less, but in the whole, I mean we're selling, I believe, it's 19... we listed 19 properties. It's like 56 or 57 individual buildings. When you take them collectively as a whole, we're expecting a fairly substantial gain and that's... one hand it's great. On the other hand, it creates a lot of complexity for the company because we have as a REIT, you know, we have to either pay tax on that gain or we have to make a large distribution to the shareholders or we have to reinvest those proceeds on a 1031 transaction and that's our intention right now is to work through. It is fairly complex working through an appropriate reinvestment scheme and we've actually done reverse 1031 transactions with 1227 25^th Street to help prepare us for that. That's the first part... the first part of your question.

 

Second part is on the White Flint Area. We... it's one of our biggest concentrations of properties actually in generically in that sort of White Flint area. We... several years ago, we bought the Randolph-Montrose Shopping Center. I don't know if you're familiar with that one. It's right at the intersection of Randolph Road. It's kind of behind Rockville Pike. It has the Gold's Gym in it, a G Street Fabrics, and our intention there is to... we did a... we called an interim redevelopment of that property and it has been very successful and we've actually gone... we've been part of the master planning process and we have significant ability in the future, not in the next three years or five years even, but perhaps 10 years from now, we can increase the density there, Mike (inaudible), like four folds. So we would in essence someday replace those shopping centers with high rises.

 

We also have great property as it exists today, One Central Plaza, which is right across from White Flint mall and our 6110 Executive Boulevard is in the White Flint area. We have an apartment building, the Bethesda Hill, which is a huge beneficiary of all the activity that's going on with Walter Reed relocating to Bethesda. So we've got a lot of irons in the fire around there and we continue to think it's good. It's a little spotty today but I agree... I think you were going with that that it's a good... a good area for investment in the future.

 

Was there a question... yes, ma'am.

 

Female Participant 1

I have just sort of a series of questions.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Sure.

 

Female Participant 1

Does some managers have securities in their shopping centers. Does WRIT provide security in the shopping centers and are they working with the Montgomery Village Foundation on the Surrats (ph) and what are their plans for the Montgomery Village Shopping Center?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay. First part of your question, do we have active security? We don't necessarily have security guards standing in all of our shopping centers. We often times have relationships with off duty police officers that police some of those shopping centers and it all depends on a particular shopping center and the nature of issues at that particular property.

 

Second part of your question, we participated... we haven't specifically participated in Surrats (ph) with Montgomery Village Foundation. We certainly have spoken to them and have talked to them and received their input as to what they think but, no, to answer your questions specifically, we have not engaged in Surrats (ph) with them.

 

And then the last part, do you have plans for Montgomery Village? Yes. We are looking at a number... here's the biggest issue with Montgomery Village Shopping Center. You need an anchor before you can really retest that shopping center and we're actively looking today and soliciting interest from larger format type retailers so that we can start reengineering that property in terms of a little more... quite frankly, we would like it to be a little more robust center and it's gone through... it's probably our softest shopping center, but we really like the location long term and we think once we're able to secure some anchors that we can then push forward with the redevelopment plan, but it's tough. It's caught in the worse kind of thing. You can't redevelop the things till you know who your anchors are going to be and how you're going to configure the shopping centers. That's what we're working on.

 

Female Participant 1

Well, I heard from some of the retailers that rent has went up in the past couple of years during hard economic times and several closed and the grocery store that came in is very unsatisfactory. I'm wondering how long their lease is for and whether that is going to be replaced with something better.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Well, I guess it's just depends on which side of the equation you think is unsatisfactory. As a shareholder, that shopping center is paying significantly more rent than the prior ones, so that's a positive to it. You know, many people have different views on this.

 

Female Participant 1

It doesn't service the area. It draws people in from outside but it doesn't service the area. We have to drive to the three-mile grocery store now.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Yeah. Well, unfortunately, we would have loved to have kept Giant. We did everything we could to keep Giant. They had no interest in renewing that store. So, the ball was taken out of our hands with respect to the anchor there. So what we had to do in the interim was refill that while we look for better solution on a long term basis. So some people actually like that store. It's like everything else in the world. Everybody's got a different view on a retailer. My wife thinks something is good, I think something else is good and we have both very valid views but she likes one thing and I like another and the same thing with that grocery store. We've had a number of good responses of how that serves a community. Actually have better service than Giant did. Now, I know other people have differences of opinion. As a shareholder, you should be happy that they pay significantly more rent than Giant ever did.

 

Female Participant 1

Well, that's nice, but if you don't speak one of their languages, you're out of luck.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Well, one of the great things about Washington is that it's a diverse area and everybody plays in green at the end, as in money; and that's what really counts.

 

Let me play another example. I know some people have negative views of some of the smaller grocery stores, but we had a shopping center in Wheaton Maryland. I don't know if you're familiar with Wheaton Park. It had what many people would have considered a great anchor which was Superfresh, which is otherwise known as A&P, for those of you may know. Superfresh did... I believe it was $5 million. It was a dying store. Super Fresh could care less about than center. They were looking to minimize their expenses. We eventually worked out, got rid of Superfresh. Remember, they were paying... they have $5 million in sales, which for supermarket it's horrible, by the way. We replaced them with a store commonly called H&R Hanna room (ph). It was an ethnic grocer. They reenergized the entire center. Their sales went almost in one year, went to $23 million or $25 million in a year. They completely transform the shopping center. Now, some people don't like the offerings but there are a lot of people that did five times more than actually like a traditional A&P, so it's not always bad. I mean we live in a diverse world here and there are different folks and different communities. So I understand that some people weren't crazy about the use that went in there. And, you know, we're looking at different alternatives on a long-term basis, but there are people that like it and they'd shop there and they are good rent payer and to be honest with you, I'd be lying to you I if I didn't tell you, they've been a good tenant. We've got nothing but good things to say about the folks and their business. They're very respectful people, so.

 

Yes, sir, in the back.

 

Male Participant 4

Yes. One more question. Maybe I was out of the room for this, but to clarify it, how is the preferred stock on the sector with (ph)?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

How's it's going to affect what specifically?

 

Male Participant 4

Affect the stockholder?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

In my view, it's not going to affect the common shareholder at all. Let me just make one comment, I mean preferred shares are owned... are right to virtually every public REIT have or I shouldn't say virtually every... the vast majority of REITs have the ability to issue preferred shares.

 

Let me make one comment on just in case you're worried about it. I'm speaking for myself. I'm probably speaking for every officer in this company. But my WRIT stock that I own personally is by far, but not even a close second, the vast majority of my own personal wealth. So I would never recommend nor would any other people in management anything that we thought would have any negative impact on the common shareholder. It's... one other thing about preferred shares that should make you feel better. As we went through the financial crisis, WRIT did relatively speaking very well, because we've had a very conservative financial history. There is one group of REITs that did better than anybody else out there and those Are Public Storage and PSB Business Parks, which have really... they're not the greatest assets. They own storage facilities and they own really B or B- office parks and the reason they did better than everybody else is because they virtually have no debt and they have preferred stock and because the world recognize that they didn't really to have finance things. So it's just another arrow in the quiver that companies need. If the financial crisis thought us anything, it's that you need various ways, various arrows in the quiver to refinance your company. I can't even imagine that we're going to issue preferred stock any time in the near future because it's just... the pricing isn't that great for us right now, but you need to have that capability in the future. So my answer to you is I think it will enhance you position as a shareholder in the long term.

 

Yes, sir?

 

Male Participant 5

On that subject of preferreds and all and the dividends and funds from operation, I noticed on page 3 some of the figures are a little different than Mr. Camp said. But if we earn $1.79 from funds from operation and pay a dividend over $1.73 and whether you issued preferred stock which I think roughly at 7% or 8% yield on that, I don't see how you can make money on it. And like the number of common shares increased from 44 million to 46 million in the last five years, so I don't see where we're invested that money to increase our funds from operation. And my second question is could you tell us the percentage of people that voted on number seven on advisory vote on compensation and percentage who voted yes or no?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay. Let me take this in order. I agree with you on your observation about preferred stock and how it would make sense like you said probably stuff I don't know what exactly rate would prefer. I agree with you. We're not anticipating at any time in the near future of issuing preferred stock. You're probably right; it doesn't make any sense today. But things change. Those are very flexible financing alternatives. The way they're typically issued. There are no call for five years and then it's the company's option whether it make sense to pull them back or not. So again, it's not something that we're necessarily envisioning in the near future, but it's something you need on a long-term basis.

 

What's the other part of that question?

 

Male Participant 5

(inaudible)

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Well, without question, we went through a financial crisis and as everybody went... every REIT in the business, I'm probably sticking my neck out a little bit on that, if not every REIT, virtually every REIT went through a period where the coverages went down and very few companies probably showed much of an increased over five years ago. We went through the worst financial crisis of our lifetimes, many of us. So, yeah, it dropped a little, much to (inaudible) but we got through it better than the vast majority of the REITs in the universe.

 

And next question I'm actually going to pass it off to Laura who you asked for the specific votes on number whatever. Laura, could you answer that question?

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

On Proposal 7, which is the advisory votes on executive compensation and... Proposal 7 which was the advisory vote on executive compensation. 69% voted in favor and, Tom, how many no's did we have?

 

Tom

1.87%.

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

1.87% of the outstanding shares voted against.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Any other questions, I kind of need to wrap it up here. Okay. One last question. The gentleman that ahead of me.

 

Male Participant 6

I've been a shareholder for about 45 years and I considered myself... I don't consider myself a sophisticated investor and that WRIT is my largest holding. However, in the last couple of years, and I've been coming to most of the meeting since I retired 25 years ago, and there are many basics that you've cited that I agree with. One of them being that all of your properties are in the area where you can reach them. You don't have to have people going to California or some other place. But we have a competitor that you didn't mention, the Federal Realty, which now is boasting a longer period than WRIT of increasing dividends. They didn't start 49 years ago but they are boasting that they've increased for more years they had been able to increase this past year and I attended their meeting and they don't have the advantage that we think is an advantage of the inflation proof characteristics of the Washington area. So I'm wondering how... what is it when we probably have a better situation in one way than they do that I don't quite understand, their stock is nearing its historic high, ours is quite a bit below our historic high. So I wonder if you have any comments of differences in the administration of the two companies.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay. First, at least I'd like to thank you for your long tenure on owning WRIT stock. It's a... you know, we really, as Bill mentioned earlier, we are here to serve guys like you. You've been the basis of this company's success over a long period of time so thank you for that.

 

I make no apologies for Federal Real Estate Investment Trust. I mean they're a great company and they've been run very much like WRIT in a very conservative format for a number of years and I personally own a little bit of FRIT stock myself. So they're a good company. There's business in the world where there's only one good company in the world. There are many good companies and FRIT is one of them and I believe WRIT is one. They have a very different operating philosophy from us. So in their balance sheet, they have a really conservative approach to balance sheet very much like with WRIT but they're just in retail. They're just in neighborhood retail. But I think if you carved out our neighborhood retail which arguably has been our best performer over a long period of time, we probably have a performance... performance more than they do. But they don't have flex buildings like we've had. They didn't suffer through the downturn. They didn't have some of the suburban office buildings that we have to suffer during the downturn. They have very different property mix than we do. So I don't want to make any apologies. I mean they're a good company. I think WRIT is a good company and they've been very successful in navigating through this process, but they have a very different portfolio composition that we do.

 

Male Participant 6

I think I should ask the question, what could WRIT do to increase the confidence of the investor community so that they would put the price up in the way that they have to (inaudible).

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Well, as you know as we presented earlier, we've concentrated on investment on more defensive line of properties and I think it's fundamental core. That's one of the reasons why FRIT has been very successful. They're in a very limited bottom markets, they're very defensive grocery anchored supermarket driven centers, and from that core concept, it's very similar to, you know, in a different way than what we're doing. We're focusing more on defensive oriented properties inside the Beltway on Metro locations. So it's in many ways it's a different approach, in many ways it's a similar approach.

 

Okay. With that, I'll pass the baton back to John.

 

John P. McDaniel – Independent Chairman of the Board of Trustees

Thank you. Thank you.

 

All right. Now we'd like to move onto part two of today's voting meeting and Laura would you pick it up and spreads on to...

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

Okay. Thank you, John.

 

I've been informed that the articles of amendment approved at this meeting in connection with Proposal 3 have become effective under Maryland law. The last item of business before this meeting is Proposal 6, which is the proposal to amend the company's Declaration of Trust to authorize 10 million preferred shares for possible future issuance by the company. The affirmative vote of the holders of the majority of the outstanding common shares is now sufficient to approve Proposal 6.

 

I now call for the vote on Proposal 6 as described in the proxy statement and also during the Q&A that Skip responded to one of our shareholder's questions. As mentioned previously, anyone wishing to vote in person or to change your vote from the instructions previously given in your proxy, please raise your hand now so that necessary ballots can be passed out. The polls are now open. We will hold the polls open for 10 minutes or such earlier time that all shareholders indicate they have completed their voting activities. So if you need a ballot please raise your hand and someone will come around to provide you a ballot.

 

Okay. So this time, we do have something to pass the time while the polls are open and if you will indulge some of us, we intend to embarrass Skip by presenting a video of his recent appearance on the Mad Money Show hosted by Jim Cramer and as many of you, if you've watched Cramer, yes, he provides a lot of economic and financial information and all the while being quite entertaining. So without further adieu...

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Actually, this is the best show I've ever seen.

 

[laughter]

 

Male Presenter

I like him a lot better when he is quiet.

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Yeah.

 

[laughter]

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

Okay. I see the technician is up in booth, obviously working on the sound. I'll wait for a few signals but obviously that wasn't the entertainment we were hoping for.

 

[laughter]

 

[video]

 

Jim Cramer – Mad Money

We're always looking to take the pulse of the real economy here on Mad Money, not what the futures are doing. I am not a top down guy. I don't like to take my cue from the so-called macroeconomic statistics. A good picture how the consumer confidence, never put out by the congress and they don't treat me. No, my philosophy is more bottoms up. You know, I like to listen to what individual companies have to say, then piece it all together, like a mosaic, come up with my own world view to help you make the decisions. And when we're facing the new day together, I love to hear from these CEOs. I mean I'm shocked because they can give us a terrific way of help commercial real estate, all different times, their particular focused areas, everything from retail to office space, industrial activities. That's why tonight I want to highlight Washington REIT, WRIT, which owns a diversified portfolio of 85 properties in the Washington DC metropolitan area. They have about 44% of office space, 15% medical offices rental, 14% retail, 15% residential, and 100% (ph) industrial, although their industrial properties are up for sale. I want to know more about that. Now, the DC area is one of the strongest regions in the country because as we're well aware, unlike companies are battling the federal government. It tends not to stop spending when the economy slows. It accelerates. That's one of the reasons why Washington REIT is doing so well. It reported a healthy quarter back on April 28^th when funds from operations and I think (inaudible) per share for (inaudible) coming in at 49 cents up 2 cents each (ph), revenues that rose 6.3% year over year. The best reason to own a REIT is the dividend and Washington REIT is those (inaudible) with a 5.3% yield. This is a company that's either raised its dividend or held it steady for 49 straight years, no cuts. But right now, the dividend needs to be supported by more cash flow. We're going to check with management to be sure the profits were dividend boost with Washington REIT. Let's talk to Skip McKenzie, the CEO (inaudible).

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Thank you, Jim.

 

Jim Cramer – Mad Money

Now, you're in Washington, which we think is very insulated from the rest of the economy. But for the first time, we hear talks about maybe budget cuts and we hear about cutbacks. What is the state of that area given the fact that there is some newfound religion that the federal government can't spend like it used to?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Well, of course, we don't know specifically what the federal government is going to do. Right now, it doesn't know how we're living now. But what we know is what happened in the past and as you correctly stated earlier, we've looked back over 20 years and this crisis had hit Washington and business expansion hit the country, Washington has always grown. It doesn't matter who's the president. It doesn't matter who the congress is. So we just tend to after periods of crisis tend to accelerate. We've seen a lot of that last year with office demand in Washington in particular.

 

Jim Cramer – Mad Money

Now, you are making some shifts. You're talking about buying more office. You talked about on the conference call maybe getting some more apartments but moving out of industrial. Our feeling on Mad Money is that industrial is really booming. Why is that the right move for you at this time?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Okay, Jim. I think that's a good point and I think it's important to understand the nature of what we call industrial, which may be somewhat of a misnomer. As you know, we don't make anything in Washington. It's mostly hot air and rhetoric. You don't need warehouses for those things. And what we call industrial in our portfolio aren't really the high-bay warehouses. We tend to have the smaller-bay things that have those home improvement contractors and things of that nature. And those things really got hurt in the downturn and what we found over an extensive period when we studied the different sectors is that our industrial portfolio tends to exacerbate the highs and the lows.

 

Jim Cramer – Mad Money

Oh, so you want to smooth things out?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

That's exactly right. It's more of a defensive move. And today, there's so much capital chasing real estate in Washington DC. What we're finding is that essentially there are only two markets in the country any owner wants to own and one is New York and one is Washington.

 

Jim Cramer – Mad Money

Absolutely.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

And there's a tremendous amount of capital that wants to be placed in our market. So we think the timing is right today to actually offer an operating platform in the industrial portfolio. We'll be taking those proceeds and redeploy them into other asset classes that we think will have better growth over an extended period of time.

 

Jim Cramer – Mad Money

Okay. Now, you know Michael Nuk, (inaudible) Advisors and Analysts, he says, I got questions on DC fundamentals in general, I check with him all the time. One of your peers this quarter said they saw a pretty significant short-term slowdown in leasing activities. How much budget is there. You're not seeing that, right?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

No. I wouldn't call them like I'm saying we're seeing a little bit of a pickup actually in activity. There's no question that over the last year, you've seen people... a little bit of hesitancy to go forward and sign leases. They just don't know where the economy is going. We don't see it rolling back and going back. But there's definite hesitancy for people to extend their leases in some, take that extra space. They tend to jam together. So we've seen that over the past, let's say, 12 months. But coming out of the new year, we have seen a pickup and it's worse in our properties and we believe that we're actually... we think we're coming to the point where we're seeing a slow growth throughout 2011.

 

Jim Cramer – Mad Money

That's what we want to hear when we talk about the economy, that's it. You're... what's more of... you've been a terrific (inaudible). We were looking at the cash flow and wondering whether at this particular moment you covered enough to be able to boost it. Are there some things in the worse that will ease our concerns about that?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

As you've stated earlier, we have a 50-year or 49-year track record of equal or increasing dividends. I don't know if there are many companies...

 

Jim Cramer – Mad Money

(inaudible)

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

...there's very few that have that record. So it's a huge part of our franchise and the very fabric of our company and when the financial crisis hit, I would say most of our peers in the REIT industry cut their dividends more than half, I believe, is the number. And we chose to take a different approach. We felt confident in the quality of our properties and the quality of our market really is the secret sauce to our success really. And we... should be 93%, 94%. So we have about 5% that we can grow our occupancy. And the mathematics is somewhere around $0.04 per 1%. So if we grow our occupancy back to our normal levels up to the 93% or 94% level, we could add $0.20 per share to our bottom line.

 

Jim Cramer – Mad Money

Okay. Then don't worry about the cash flow, taking it along plan. If anything, the next thing would be a boost, if you have the ability?

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Certainly. It's up to our Board of Trustees. That is something that I certainly would look at in the future.

 

Jim Cramer – Mad Money

Well, we are thankful for companies like yours. They're vital for diversification for people's portfolios and properties (inaudible) with that yield is what keeps people in the game. Yesterday, everyone's throwing away stocks; all the yielders did quite well. Thanks for coming on the show. Thank you.

 

George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer

Thank you.

 

Jim Cramer – Mad Money

Skip McKenzie, President and CEO of Washington Real Estate Investment Trust. Do you know how much I like these plus 5% yielders, but it seemed to diminish by the day. Check this one out. It could be right for you.

 

[applause]

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

That one was beautiful.

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

Thank you, Skip.

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Thank you, Cramer.

 

Laura M. Franklin – Washington Real Estate Investment Trust – Executive Vice President of Accounting and Administration and Corporate Secretary

Yes. Thank you, Cramer. So we've got a little bit of exposure there which was really wonderful for the company and for our shareholders.

 

I've been informed the polls are now closed. So I'm just going to pause for one moment and the results are going to be presented to me on Proposal 6 and that's the last matter of business before today's meeting. Thank you.

 

So anybody know if it's raining outside? I wouldn't have any (inaudible) fortunately and (inaudible)

 

Okay. Mr. Chairman, I've been informed by the inspector of elections that Proposal 6 has received the favorable vote of the holders of more than a majority of the outstanding common shares and this proposal has therefore been approved.

 

John P. McDaniel – Washington Real Estate Investment Trust – Independent Chairman of the Board

Great. Thank you very much and thank you very much for your time and attention today and without any further business to be conducted at this 2011 annual shareholder meeting, I would call the meeting adjourned. Thank you again for attending.