Let me state at the onset, this article isn't meant to be bullish or bearish regarding Washington Real Estate Investment Trust (NYSE:WRE). Additionally, a diversified REIT such as WRIT is somewhat complex to analyze and evaluate its valuation - so this article will not attempt to go there as well. What this article will do is question the company's 2013 strategic initiative and solicit comments of varying perspectives from readers of SA, REIT investors, and anyone else that feels they have valuable insight.
First off, for those who haven't read WRIT's 2013 Strategic Initiative, here's the full transcript. For those who just want the cliff notes, here are the highlights:
-Intent to sell medical office portfolio and reinvest into higher quality assets in DC
-Focus on high quality live, work, shop assets in DC
-Increased focus on development (2 JV multifamily projects breaking ground in 2013 and hired 2 executives with significant development background)
Prior to discussing the finer points of this initiative, from an external perspective, this seems like a rational strategy. I mean it sounds good - who doesn't want to elevate the quality of their real estate assets? Who doesn't like the concept of mixed-use real estate? Who doesn't like huge significant gains on the sale of properties? Who doesn't like the idea of creating more value through development? Frankly, I'm surprised the market didn't take more kindly to it.
Here's the fatal flaw to the strategy - it's not in WRIT's wheelhouse. WRIT's bread and butter historically has been small shop tenants, class B product, and driving occupancy/rents. WRIT successfully found and leveraged this niche effectively in the DC metro market. From small office tenants at 1901 Penn to all the sub 2,000 SF medical office tenants - WRIT has effectively marketed, leased, and raised rents on these tenants like Seal Team Six executed its mission on Bin Laden.
Creating a new strategic direction to somehow change WRIT into a company focused on trophy product, larger and more sophisticated tenants and competing with entrenched competition is like telling Joe Montana to quit throwing the ball and switch to linebacker.
Regarding development - yes, development can make a lot of sense, but only if you know what you're doing and you're good at development. WRIT has engaged in development before and I doubt there's a single development project that didn't go significantly over budget and ultimately underperformed pro forma projections. Again, development is not in WRIT's wheelhouse and it's an extremely risky endeavor.
The medical office portfolio - this has been the feather in WRIT's cap for some time. When everything struggled during the financial crisis, at least the medical office portfolio was keeping its head above water. WRIT has been instrumental at raising rents on medical tenants as their leases expire. The portfolio is the essential definition of shooting fish in a barrel. Yes, selling that portfolio will generate significant gains / proceeds, but realistically, what will WRIT be able to find in short order to reinvest those proceeds? My guess is they'll end up acquiring a trophy office building in DC at a lower cap rate than what they get on the medical office portfolio. I'll also venture to guess that asset will have a few large law firms, lobbying groups, etc. These type of tenants and the office environment of DC will be much more challenging for WRIT than managing their existing medical office portfolio. Essentially, I doubt they'll make a smart 1031 exchange.
The CEO succession - everyone that knows the current CEO (Skip McKenzie) usually only has kind words and a few crass stories about the man. He's quite the figure in the DC real estate market and he will be tough to replace. That said, I respectfully disagree with the strategic direction that WRIT has undertook and there's a lot of opportunity for a successor to change course and better leverage the company's position in the DC real estate market.
The DC market has some significant headwinds in the forecast. When times are tough, one should focus on their strengths, not devise some new strategic direction. I hope WRIT reconsiders its strategic direction and can re-focus on what it does best.