A firm representing shareholders of Washington Real Estate Investment Trust asked the company’s board this week to either explain where the company was headed or put it up for sale.

Founded in 1960 and focused exclusively on the Washington area, Rockville-based WRIT is the oldest of the country’s publicly traded real estate investment trusts, companies that hold property long-term and pass on almost all of their taxable income to investors.

For 50 years WRIT had been a model of stability, increasing its dividend for 202 straight quarters until 2012.

Since then, the company has been attempting to re-invent itself, hiring a new chief executive, embarking on a comprehensive strategic review and then selling two large portfolios, industrial property and medical offices buildings, that constituted about a third of its company’s value. Two deals for medical offices brought the company a combined $500.8 million.

The changes are not sitting well with clients of McAdams Wright Ragen, a Seattle brokerage and advisory firm.

Collectively, McAdams clients own 3.9 percent of WRIT shares. In a Feb. 24 letter to  Board of Trustees Chairman Chairman Charles Nason, McAdams Wright analyst Mike Roarke wrote that since his firm had advised clients to purchase WRIT shares in March of 2011, WRIT had cut its quarterly dividend by 30.8 percent and that its stock (excluding dividend reinvestments) had lost 6.1 percent since then. 

“Following Washington REIT’s recent property review process it’s now worrisome to us that the management team is either unwilling or unable to clearly explain how they intend to grow these key financial measures and what they are broadly targeting for achievement on these fronts over the next few years,”  Roarke wrote.

He added that although it’s difficult to make precise predictions about the company’s future that “every serious organization has a game plan” and that the company’s management needed to improve communication with shareholders.

“In absence of a real growth strategy complete with general financial targets that are being pursued over a reasonable amount of time, we request the Board of Trustees consider a sale of the entire company,” Roarke wrote. (The complete letter is below.)

Bill Camp, WRIT executive vice president and chief financial officer, issued a statement in response to the letter saying the company always welcomes feedback from shareholders and was positioning the company to create value in the future. Just Tuesday, the company announced it had acquired Yale West, a 216-unit apartment building in the Mount Vernon Triangle neighborhood of Northwest D.C., a reflection of its move to acquire high-end properties in urban neighborhoods.

“Consistent with this objective, our Board and management team, under the direction of our newly-appointed President and Chief Executive Officer, Paul McDermott, recently undertook a comprehensive review of our assets and we are implementing a new strategy to upgrade our portfolio,” the statement read. “Today’s announcement of the acquisition of Yale West, a Class A, 216-unit apartment building in the Mount Vernon Triangle neighborhood of Washington, D.C., exemplifies this strategy as this is a high-quality property with significant potential.  We are confident that Washington REIT is executing the right growth strategy for the company and for all of our shareholders.”

WRIT is not yet five months into the tenure of Paul T. McDermott as chief executive, and its stock price has fallen from $25.61 on McDermott’s first day on Oct. 1 to $24.27 when it opened Tuesday morning.

Paul T. McDermott, the new president and chief executive of Washington Real Estate Investment Trust, in Rockville. (Courtesy WRIT).
Paul T. McDermott, the new president and chief executive of Washington Real Estate Investment Trust, in Rockville. (Courtesy WRIT).

McDermott succeeded George F. “Skip” McKenzie, who served as president and chief executive beginning in 2007. He and the WRIT board just emerged from a four-month review of operations and performance of all of its properties with plans to focus the company on office, residential and retail properties.

WRIT is following a number of other firms in trying to move into more urban, transit-accessible parts of the region. Don Wood, president and chief executive of Federal Realty Investment Trust, another REIT based in Rockville, said he had met with McDermott to discuss the company’s strategy, and found it reasonable.

“They are D.C.-centric and that’s a strategy that worked for a long time and I don’t know why it couldn’t work to tell you the truth. I think Paul has gone through the review. He’s trying to become less suburban and more urban, just like everybody, and it looks like he’s sticking to those three product types,” office, residential and retail, Wood said.

“I think he’s committed to his businesss. The basis of the company makes sense. You’ve got a new guy in charge, that from my perspective deserves a chance to work with his board and his team to right the ship,” Wood added.

The Paramount apartments in Crystal City, which WRIT purchased for $48.2 million last year. (PRNewswire)
The Paramount apartments in Crystal City, which WRIT purchased for $48.2 million last year. (PRNewswire)

Disappointment in the company’s lack of earnings predictions has been simmering at McAdams Wright Ragen. A few days before sending the letter, Roarke asked McDermott for some long-term growth targets on the company’s Feb. 21 earnings call, according to a transcript. Here is an excerpt:

Roarke: So as part of your review plan, I have been very hopeful that you would come out with mid-range targets that investors could kind of keep pace with as far as how you’re going to grow revenue, how you’re going to grow [Net Operating Income] and then eventually resume growth of the dividend. Did you establish that as part of your review process, are you able to share any kind of those mid-range ambitions?

McDermott: Well, certainly we’re not giving guidance out longer than in that one year, I mean it’s really hard to predict with the markets the way they are today. Our goal of course, and certainly it’s something that we talk to our Board about every quarter, is to get into a position to grow that dividend.

Roarke: So you don’t have any mid-range plans then to share with us?

McDermott: Not at this time. You are talking about going out two or three years. Tell me what the forecast looks like?

Roarke: Were you not able to come up with those or is it just…

McDermott: We don’t share them.

Roarke: Okay. You have them, but you don’t share them?

McDermott: No, we don’t – I mean, we share them with our Board. We have long range forecast, but they’re highly dependent on the acquisition volume, disposition volume. They are harder to predict with any kind of certainty.

Roarke: Okay. Being able to share those I think would really help in developing a better understanding of where you want the company to be fundamentally over the next few years just from an outside investor standpoint?

McDermott: I understand.

Roarke: Thanks.

Apparently Roarke was not satisfied with the chief executive’s answers. Here’s the full text of his letter:

Washington Real Estate Investment Trust
Board of Trustees c/o Chairman Charles Nason
6110 Executive Boulevard, Suite 800
Rockville, MD 20852-3927

Dear Chairman Nason and Washington REIT Board of Trustees:

McAdams Wright Ragen is a brokerage and investment advisor based in Seattle. As of February 21, 2014 clients of our firm owned 2.6 million shares of Washington REIT stock in a combination of commissioned-based brokerage accounts and discretionary advisory accounts [1.5 million shares in accounts over which McAdams Wright Ragen has investment discretion]. This amounts to approximately 3.9% of your diluted share count.

Since our research group initially recommended Washington REIT shares on March 23, 2011, the company has cut its quarterly dividend 30.8%. Funds from operations have declined and the total return of Washington REIT stock, excluding dividend reinvestments, has been -6.1%. This compares to a gain of 25% for the S&P 500 Index, marking a relative underperformance of more than 30%.

As generally longer-term investors our interest is developing a sound understanding of how your company plans to grow revenue, NOI, FFO per share and the dividend payment. Following Washington REIT’s recent property review process it’s now worrisome to us that the management team is either unwilling or unable to clearly explain how they intend to grow these key financial measures and what they are broadly targeting for achievement on these fronts over the next few years. We are not seeking precise predictions about the unknowable. But every serious organization has a game plan and we are asking for improved communication with all shareholders around these fundamental measures so we can make a better assessment of our holdings in your stock and best serve our clients who trust us with their money.

In absence of a real growth strategy complete with general financial targets that are being pursued over a reasonable amount of time, we request the Board of Trustees consider a sale of the entire company. Funds from operations per share at Washington REIT have not grown in more than a decade and the company has effectively been shrinking with the sale of two large property portfolios.

Thank you for taking the time to consider these issues.

Mike Roarke
Analyst
McAdams Wright Ragen

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