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Washington Real Estate Investment Trust (NYSE:WRE)

Annual Shareholder’s Meeting 2013 Conference Call

May 16, 2013 11:00 am ET

Executives

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

Laura M. Franklin – Executive Vice President-Accounting and Administration and Corporate Secretary

George F. McKenzie – President, Trustee and Chief Executive Officer

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

John P. McDaniel

I would like at this time to make some introductory remarks about your Directors and introduce them one by one and then comment a little bit later above and distinguish additional guests that we have here this morning.

Later on in the meeting after I sit down, Skip McKenzie, our CEO will be introducing the company’s officers. So we’ll have an opportunity to meet the guys and the branches that really make this company go forward.

I will start – and this will be alphabetical order and there has been some debate as to whether we ought to introduce the most important Director first, versus – but I suggested we do it in alphabetic order, so we are going to start and it maybe one in the same.

With Bill Byrnes; Bill, would you stand to say hello? Bill is currently Chairman of the Board of another publicly held company, CapitalSource, commercial lender operation, principally through its subsidiary CapitalSource Bank Incorporated. Bill was also the founding and Managing Director of Wolverine Partners. I think that’s because he came out of the University of Michigan; there is some connection with that, which operates a mutual fund and is also – has been for 17 years with Alex Brown & Sons most recently as Managing Partner and Director. He is the head of the financial institutions investment banking group in that organization. He is also member of (inaudible), a corporation of lodging real estate company JDG Realtors, another retail REIT.

Bill brings out tremendous experience to the board with regards to his understanding of the capital markets and the finance expertise that we do need as he is an investment banker by training. He also brings a significant experience from the other boards to numerous dimensional, which he has served in the past. So Bill is one of the trustees who is up for re-nomination and for re-election and we’ll find out Bill little later as to whether the votes are there. And so there could be a (inaudible), but we’ll hope you get these necessary votes.

And so there Ed, would you please stand. Ed is the retired Chair of the Board of Catalyst Health Solutions. Very successful, publically traded pharmacy benefit management company. He also currently serves as Chairman of the Board of MedStar Health System and has done an outstanding job for a number of years there. See, most advanced in our opinion Ed, our healthcare delivery system in the region. And Ed has spent 25 years prior to that time with Coopers & Lybrand and Ed is the Chairman of our compensation committee and brings a lot of past experience – necessary experiences, not only a Chief Executive Officer, but someone who really understands the local market here from the standpoint of business and commerce. And so, Ed, thank you for serving on the Board.

Skip McKenzie, again alphabetical order. Skip, you all know is our President and Chief Executive Officer. He will make some comments later on behalf of the management and CEO. Skip joined the Board in 1996, served in a number of capacities since that time, including Executive Vice President Real Estate and then under Ed, Chief Operating Officer. So Skip has brought a host of real estate experience from the community, as well as just understanding of this market to the Board.

In January, Skip communicated to the Board that he – his decision to retire as the CEO of WRIT at the end of this year and the Board has commenced the search for a new Chief Executive Officer. We’ve engaged Ferguson Partners out of Chicago, premier real estate company to do that search. It constituted a search committee. I’ve served as Chair of that search committee, to look for a successor to Skip.

Skip is one also of our three board members who are up for reelections and has agreed with regard to the selection process that if he is reelected to the board, that he would be resigning from his term of the Board effective at this point in time that a new Chief Executive Officer comes on Board or the desire of the Board to have the transition period. So, Skip, thank you for your service and for your cooperation and support of what we are trying to do to make a smooth transition to a new CEO some time during this year.

Chuck Nason. Chuck would you stand? Chuck is the retired Chairman and Chief Executive Officer of Acacia Group, which includes Acacia Life, Acacia Federal Savings Bank and Calvert Group, all based here in Washington, and there has been a few mergers along the way.

But Chuck is the past Chairman and Director of The Greater Washington Board of Trade. He served as a Director for years, about 10 years I believe at MedStar Health. He is the past Chairman and member of the Board of Trustees of Washington and Jefferson College and Chuck brings not only the CEO experience succeeded for our Board, but he has also brings a real experience in the Community of Washington where we are based as a real estate company. And Chuck serves as Chairman of our audit committee and I think almost five years, Chuck has lived in that capacity.

Next is Edgie Russell, Edgie please? Edgie has served as President and Chief Executive Officer of Partners Realty Trust from about 1990 to his retirement a few years back, 2006. Partners is a – and was, was I mean, it’s a real estate company that progressed on ownership and operations of apartment, office and shopping center real estate assets, Edgie also serves as a member of the Board of Keswick Multi-Care Center in Baltimore. And he has been previously Chair and served on the Boards of Florida Rock Industries, a publically traded construction materials company and became the Chief Operating Officer of their wholly-owned subsidiary, Arundel Corporation. So he brings a lot of experience in real estate and in Board activity and management and we are grateful that Edgie is on our board.

Wendy White. Wendy, please? He’s the partner at Pillsbury Winthrop Shaw Pittman. We used to know then just as Shaw Pittman and it was easier then Wendy, but it had (inaudible), where she has practiced Law since 1981. She is former member of the Pillsbury management board and currently is the head of the firms D.C. real estate group. Brings tremendous experience in transactions in the real estate world and knowledge of the real estate community, which is so important to us as we go forward at WRIT. She has been consistently one of the leading real estate attorneys in the District. She Chairs our corporate governance nominating committee. So she brings a tremendous amount of transactional experience to our board and her background perspective is one of the top lawyers consist only the – identified as one of the top lawyers in D.C. real estates. It’s very, very important to us.

Andy Winn. Now is this is no dubious. So we’re at the end of the spectrum. Andy is the President, Middle East-Africa Region, Corporate International Business Development, at Lockheed Martin Corporation. I am not sure how he get that on one card, Andy, on two sides, right? And then one side of course has to be Arabic, so we got – but he prior to that time was Vice President, International Maritime Programs, International Business Development at Lockheed. So Andy brings the corporate world experience, lot of our leases are with the Federal and corporate world that exist here in D.C. And before that retired in 2011 after 32 years of service in the United States Navy as an Admiral, served as Naval Inspector General, important role from 2007 to his retirement and then before that served as Director for the Operations of the Joint Chiefs of Staff and Andy has served in other staffs and leadership positions throughout the Pentagon. And again that’s a very important role for us as we’ve been based here in Washington.

To fill out the agenda, my background after 27 years as CEO of MedStar Health, but established a private equity concern and in the healthcare field consulting advisory concern, Hickory Ridge Group and Hickory Ridge Capital, and I have done that since my retirement a few years back. At MedStar, I have been Chairman of the Greater Washington Board of Trade and as I talk and have a feel for the community and have been active with other Board’s New York Stock Exchange for Medifast and also acting with Wittenberg University on their Board.

So with that, all being said, I think we’re in a position we can move on and hopefully deal with the things that we have to accomplish this morning. Laura Franklin, who is our Executive Vice President, Corporate Secretary will act as Secretary of the Board for this meeting and will start with some initial matters that we have to attend to. And at the end, I would like to end my comments to also introduce David Osnos, who is our Counsel to the Board. David worked for years with Erin Fox. He, I think, David, would you stand and say hello? He will be stepping down as our Counsel to the Board. And with him today is Jeff Jordan from the same firm, who is our securities counsel. So, David and Jeff welcome.

David, I’d like to single you out just for a moment, that he has been not only the Chairman of Erin Fox, a leading D.C. law firm for about 20 years, he's on legal work for WRIT going way back starting with 1987. David was on the board at 1987. He has been active. He retired from the Board in 2007. We asked him to stay on Board, as Counsel to the board. As Tom Morey came on Board as our in-house Counsel, for his position that we’ve had an in-house Counsel and he’s worked closely with Tom now for a number of years.

He is the consulate business attorney, guided WRIT and its Board through some very, very important and complex business and legal matters for many years. And on behalf, David as the shareholders, on behalf of the board and management I would like to extend our deep appreciation for the work that you have done for WRIT and the service you’ve given us. So thank you.

So, Laura, I think the show is now yours.

Laura M. Franklin

Thank you John, good morning.

John P. McDaniel

Good morning.

Laura M. Franklin

Before, McKenzie 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 presentation today will contain financial measures such as core FFO and NOI that are non-GAAP measures and in accordance with the regulation G, under the Securities Exchange Act. We have provided annual and quarterly reconciliation to those measures in our quarterly supplemental material 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 and lease transactions, the effect of credit and financial market conditions, the availability of cost of capital fluctuations and fluctuations of interest rates, tenants financial conditions, level of competition, the effect of government regulations, the impact of newly adopted accounting principles and other risk and uncertainties detailed from time to time in our filings with the SEC, including our 2012 Form 10-K. We assume no obligations to update or supplement forward-looking statements that become untrue because of subsequent events.

John, shall I commence the voting procedures?

John P. McDaniel

Yes, please do so.

Laura M. Franklin

Thank you. On or about March 29, 2013, a notice of the annual meeting of shareholders was sent and made available to shareholders at the close of business on March 15, 2013. The notice calls this meeting for 11 AM on May 16, 2013 here at this location. A proxy statement was made available to all shareholders under the notice and active procedure by which interested shareholders have the ability to request a proxy statement by e-mail, phone or Internet request. Please 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 15, 2013, the record date for this meeting, there were 66,484,759 common shares outstanding and entitled to vote at this meeting. The presence in person or by proxy of holders of a majority of all the votes entitled to be cast on any matter constitutes the quorum. The Inspector of Election has informed me that at least 90% of the outstanding shares are represented at this meeting either in person or by proxy therefore a quorum is present today.

Proposal one is the election of three Class 2 trustees to the company's board of trustees. Each despairs until 2016, the annual meeting of shareholders and until his or her successor is duly elected and qualified. The three individuals nominated by the board of trustees for election is Class 2 trustees, are John McDaniel, Skip McKenzie and Bill Byrnes.

Proposal two calls for the ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the 2013 fiscal year. And proposal three is to approve by advisory and non-binding votes the company’s executive compensation.

Before the company's shareholders vote on these proposals, each as described in the proxy statement, we want to take a moment and ask whether there is any discussion of these proposals.

I now call for the vote on proposals one, two, and three, each as described in the proxy statements. All persons acting as proxies or shareholders who have not already voted should deliver their written proxies or ballots to the voting table in the lobby. Any shareholders 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’ll be given a ballot.

There is people around the room, joined is the gentlemen in the back. Okay. Please okay, and then please indicate the number of shares that you own and whether you previously submitted a proxy to the company. The polls are now open. We will hold the polls open for the next 15 minutes, while we conduct other business. Thank you.

John P. McDaniel

Thank you, Laura. Now, we will ask Skip McKenzie, our CEO to present the CEO’s report. Skip?

George F. McKenzie

Thank you, John. Before I get started, I’d like to introduce the officers of the company. First is, Bill Camp, who is our Executive Vice President and CEO, up in the podium; Brad Cederdahl, Senior Vice President Property operations. Laura Franklin, who is our Executive Vice President Accounting, Administration and Corporate Secretary. Tom Morey is our Senior Vice President, General Counsel. Ed Murn, who is our newest officer. He is the Managing Director, Head of our Residential Division. Ed just joined us this year. Tom Regnell, the next is Mr. Burnie, Senior Vice President and Managing Director of our Office Division, and lastly Paul Weinschenk, also one of our new officers, who’ve joined us this year, Managing Director and Head of our Retail Division.

Okay, I'd like to say a few words before we open up for question-and-answers. Real estate operating fundamentals in our regions during 2012 were soft, unfortunately, just as I predicted at this time last year, particularly in the office sector where we have 50% of our net operating income. The effects of sequestration, BRAC and congressional gridlock has contributed significantly to the uncertainty our commercial tenants base as they make real estate decisions throughout the metropolitan area. Adjusting to this malaise, Delta Associates, a regional economic reporting group reported that 2012 was the first time that they’ll be keeping records which is 43 years that this D.C. region experienced negative growth in the office leasing market.

2012 was the year of the sequestration, BRAC move outs in Northern Virginia and the macro trend of technologies, effect on office users, created the perfect storm devastating the demand for office space in our region. Conditions in the other three sectors, that would operates were better although hardly to good old days we have enjoyed in the past.

Retail and residential conditions where good with low vacancies and good rental rate growth and although medical office conditions were steady, they were negatively impacted by competition from near by traditional office buildings desperate for new users and the negative growth environment.

In the WRIT portfolio, our office teams executed a 142 leases encompassing some 558,000 square feet new office portfolio leases executed increased rents 13% over the prior lease terms and at year-end our office portfolio was 85% occupied.

In our shopping centers we leased 215,000 square feet at 9% increases and ended the year at 91% occupied. Our residential portfolio of 2,540 units increased rents 4% on average of roll over and ended the year at 94% occupied.

Lastly in our Medical Office Division, we leased 192,000 square feet and ended the year at 89% lease and achieved an 8% increase in rental rates. In 2012 our asset management group focused intensively on improving and upgrading our core portfolio with lobby and common area renovations, energy efficient HVAC upgrades and the addition of new amenities such as fitness and conference centers.

Our poster chart for this program has been our office building at 2000 M Street which has been upgraded with a 6500 square foot fitness facility and a state-of-the-art conference center which can be used by all of our D.C. office centers. At 2000 M Street we also completed the new state-of-the-art chilled beam HVAC system with significantly reduced energy usage at the property, as well as providing for enhancement and comfort and more efficient space plan.

For more of this work we took a building with the 70% occupancy with little tenant interest to an occupancy in excess of 90% and vibrant tenant traffic. We continue to focus on and make energy reduction initiatives throughout the portfolio.

As of this day, 20 WRIT properties have been awarded the ENERGY STAR Award and five office buildings have achieved LEED EB designation with six additional office buildings pending designation. WRIT is also proud to be the largest user of wind energy of any real estate company in the country and the only real estate company, nationally in EPA’s Green Power partnership Top 50, we are actually number 29. WRIT has a 11 LEED designated professionals, which indicates our continuing commitment and sustainability.

In our residential division, we continue to upgrade and improve our individual apartment units, which not only achieved the very attractive 12% return on investments, but also keeps vacancies low and downtown to minimum. In 2012, we upgraded 209 units in our portfolio and have 180 budgeted for upgrade in 2013.

On the acquisitions and dispositions front, we continue to execute on our strategy of selling suburban assets and concentrating investments in more urban, metro-centric locations. On the disposition then, we sold 1700 Research Boulevard, Rockville, a 100,000 square foot office building for $14, 250,000 and recognized a $4 million gain and a 9% unleveraged internal rate of return over the 30 year holding period.

We also sold our 39,000 square foot Plumtree medical office building at Bel Air, Maryland for [$8,750,000 million]. We have recognized a gain of $1.6 million and unleveraged return of 13% over the six year holding period we own these assets.

On the investment side, we acquired the Fairgate at Ballston, a 141,000 square foot office building located at a very desirable infill location on Glebe Road in Arlington, Virginia for $52, 250,000.

On the balance sheet side of the business is listed several measures to solidify our financial strength and provide for growth capitals upon accretive improvements in our property and provide a best in class cost of capital to be competitive for acquisitions in the D.C. market place. Over the course of the year, we repaid 6 property mortgages, totaling $80 million at an average interest rate of 5.6% and in January of 2013 this year we repaid a mortgage on our West Gude property of an additional $30 million at 5.9%.

In October of 2012, we issued our largest ever bond offering of $300 million for 10 years at 3.9% which was also our lowest coupon ever. In July, we announced the reduction in WRIT quarterly dividend of $0.30 per share – [$2.30] per share. I would like to speak to this measure for a few moments.

Reducing our dividend payout was an extremely difficult financial decision for your board. This decision was made with extensive forethought, analysis and consideration of the best interest of our shareholders. While we are extremely proud to have had the public LEED record of 50 plus years of increasing dividends, the back to back combination of the extreme financial crises of 20/8/2008 with a downturn currently driven by BRAC, sequestration and the legislative gridlock dictated that we take a more conservative dividend payout profile, as many of our RIET peers did a couple of years earlier in the great recession.

By way of comparison, over this timeframe 90 RIET’s cut their dividend and many did it twice, in fact 20, including several of our peers with local property presence. The current risk dividend of $0.30 per share is more secure and on yield basis which is approximately 4% is approximately 50 basis points better than the REIT average of 3.5% and 200 basis points better than the S&P average of 2%. While the decision was indeed a painful one, in hindsight I’m confident it was the right one and puts our company at much stronger financial position. For a period of time WRIT has been paying a dividend in excess of our funds available for distribution commonly known as FAD. And the time has finally come when the ongoing uncertainty of the D.C. Metro area made this path unsustainable.

At the current dividend rate, we now have access to excess cash which enables us to reinvest back in the business to further our long-term growth and enhance balance sheet strength. In the end, I know this was frustrating for your shareholders. I’m a shareholder too and it was immensely frustrating for me in that regard as well. So all in all it was a very difficult matter for the company and our Board. But I feel it was the best and right decision.

Lastly, I’d like to discuss and update you on the perspective sale of our Medical Office Division, which we announced this past January. We purchased our first medical office buildings Woodburn 1&2 in November of 1998. The growth and performance of this division for WRIT has been a very successful endeavor and one we are very proud of. As we have amassed the dominant medical office building portfolio in the Washington region. What we have found is at this point in order to continue to grow this sector we would have to leave the region to continue to find additional acquisition opportunity.

Although we believe other invests also – we believe other investors particularly healthcare focused ones are willing to pay very attractive prices to continue to grow to a very focused nationwide portfolios. We ultimately concluded that focus on the national capital region is our strength and one of our core competencies and should remain itself. Also our job is to create value and recognize it for you, our shareholder and the sale of this division will accomplish both of those goals as we invest the proceeds into properties in our other three sectors; urban office, well located residential, and shopping centers and neighborhoods of strong demographics, creating a live workshop real estate focus and what we believe is one of the best real estate long-term markets in the world. The progress in our potential sale is proceeding well. Nothing is permanent this time, but to-date, we are pleased with where we are at this point.

In closing, I would like to address my retirement, announced this past January to be effective at year-end. This was also an extremely difficult decision for yours truly. This year I will have completed my 17th year at WRIT and over six years as your CEO. I have enjoyed every minute of those years. It has been a distinct honor and privilege to serve as your CEO and I leave knowing that you are in good hands. The employees and senior management at your company are second to none. They have carried me on their shoulders long enough. I will miss them immensely as I will, serving you. But know that you are in the best of hands.

Additionally, as John had mentioned, the Board has commenced the search for my successor and the next WRIT CEO and although they have not completed the work in this regard, I look forward to working with him or her to affect the smooth and effective transition.

So to conclude, I just want to say thank you for allowing me this great honor. Now, we will open-up the floor for your questions.

Question-and-Answer Session

Unidentified Analyst

I’ve owned shares since 1960, when you began. You’re getting a pay increase of 8.7% and at time the dividend was high, is that a good idea?

George F. McKenzie

That’s terrible idea, first of all.

Unidentified Analyst

But you are doing it.

George F. McKenzie

No, that’s not true. I don’t know where you see a pay increase of 8%, if you look in the proxy.

Unidentified Analyst

I did.

George F. McKenzie

Okay, we have two tables in the proxy by the way. There is an SEC required proxy, as well as a table which we believe is more representative of the pay. Now irrespective of which table you want to choose and if you talk about me individually, I believe on the one table I took, an overall compensation of 73% pay cut, the other one I took a 43% pay cut. I don’t think there is any analysis where I make a pay increase at all. I’m not sure where you get that number.

Unidentified Analyst

I looked in their relevant table here.

George F. McKenzie

I would agree with you at 8% pay increase for anybody would – there is nobody as well. Virtually nobody in this company has had an 8% take rate and certainly not myself and nor have any of the officers.

Unidentified Analyst

(inaudible) I hope you don’t cut the meeting short when there are still questions to be answered.

George F. McKenzie

I don’t think we ever have or do we intend to do so.

Unidentified Analyst

Yes you have, you’ve done last year.

George F. McKenzie

I am not aware of that, sir.

Unidentified Analyst

Well, I am.

John P. McDaniel

Next question.

Unidentified Analyst

My name is [Herbert Collin] and I am a shareholder and have been for 25 years or more and my question is this, has the board entertained any mergers or acquisition by other companies of WRIT or is that something that is being contemplated in the future?

George F. McKenzie

First let me say that I want to apologize. First, just stop, I want to say, thank you for being the shareholder for so long. I mean really appreciate as well as you served for being the shareholder for 25 years. That was my mistake, apologizing in retrospect for that [Mr. Collin]. First of all I mean obviously whether we are or not entertaining built by the transaction I wouldn’t comment here in a pubic format. So but let me say this, obviously we’ll do it in the best interest of your shareholders and over the years we have looked at all variety of different major strategic transactions, but obviously that’s not the fact of saying I’m going to comment on public form, but we certainly would – if we look at any variety in all manner of comp transactions over the years and we continue to do so and we are open to those type of things.

George F. McKenzie

Yes, gentlemen in the corner please.

Unidentified Analyst

(inaudible) an owner of about 300 shares of stock for about the last 10 years. I do kind of just like to slide the pan that was done to this gentlemen when the chart does show the actual salary increase went up 8%, total compensation did not but the actual cash out of the company to the officers went up that much. I got know over lining objection to it but I do think that was a little bit of unnecessary slack at – slap at a stockholder who raised about it. Point, a unrelated question is simply our properties at the Bradlee Shopping Centers need to be on the downward slope in quality and I would hope that at some point I would be delighted for management to respond to what our plans are for upgrading the character of that property and fully solidifying its reputation with the neighborhood. Thank you.

George F. McKenzie

The Bradlee Shopping Centers specifically?

Unidentified Analyst

Yes sir. Thank you.

George F. McKenzie

Okay. Honestly I am not aware of the 8% pay increase. That certainly didn’t apply to me, if you are referring to me.

Unidentified Analyst

You said in your proxy statement, is it fundamentally an error.

George F. McKenzie

No, I was talking about mine.

Unidentified Analyst

George, your salary went…

George F. McKenzie

Okay.

Unidentified Analyst

The proxy statements are ongoing on it and we haven’t done any further research.

George F. McKenzie

I was referring to my total compensation.

Unidentified Analyst

I understood that. That was the point I made. The cash out….

George F. McKenzie

Sir, my error, okay? I apologize for that error. I was referring to my total comp. Okay. So let me talk about Bradlee Shopping Center now. So Bradlee Shopping Center is probably – I’m making little subjective comment here, our best shopping center and we’re proud of all the work we have done there. I am not – clearly understand what you are referring to in terms of its going downhill. We certainly have some issues with respect to the anchor in that shopping center, which is Giant Food.

We have worked with Giant over the years. We tried to get them to expand and they have really indicated no intention to do so. We have actually signed the lease we announced on our last conference call with a, what I would call our good operator nationally ranked and I think that would be something that would be a very positive impact on the center. But honestly, we are proud of that center. We think its doing quite well. Small shops throughout America have had a difficult time, but I think that shopping center is great and getting better.

John P. McDaniel

Yes, ma’am.

Unidentified Analyst

I was just wondering, you said there was a $0.30 dividend, did you drop the dividend?

George F. McKenzie

The dividend is $0.30 right now, per share for quarter.

Unidentified Analyst

Previously, what are you looking forward for to increase that back to where it was before doing new levels in the future, but what you need?

George F. McKenzie

Okay. The prior just to recap, our prior dividend was a little bit over $0.43 a share. We reduced it to $0.30 a share. We need the markets to improve primarily, we need to lease up vacancy in our office properties. Now, we don’t have a specific number we are looking to get at, but certainly we need growth in our office portfolio primarily and we need to be able to fill vacancy.

In terms of – well our office, let’s give you an example. Our office portfolio is approximately 85% leased now. Historically at our company, when times are reasonably good, we are in the 93% range. So that’s a big gap. So we need a little bit of run underneath our feet before we’re in a position to really start thinking about raising the dividend.

Unidentified Analyst

What are you doing to achieve that?

George F. McKenzie

Well, we are taking a number of new office portfolios specifically. We are taking a number of initiatives. We’ve hired a number of outside brokers to help us with our larger vacancies. As I mentioned in my comments, we are doing a tremendous amount of renovation work in our properties and we are probably offering more concessions at this point from some pre-rent leasing commissions and other concessions that I recall in my 17 years at the company. So we are throwing everything at it.

As I mentioned in my comments, this is an extraordinarily difficult market. Last year was the first year that D.C. metro rail had negative absorption. This year, we’ve had a little bit of an absorption I mean growth over prior year’s vacancy. There is a little bit better market condition now in the first quarter, but it’s still the – we’re having defense contractors and other contractors of the Federal Government, were uncertain where the direction of the economy is and they just don’t want to sign leases, they want to give one year extension, there is downsizing and it’s not just affecting WRIT, it’s affecting an number of companies.

Unidentified Analyst

So at the appropriate time, you would increase the…

George F. McKenzie

Absolutely.

Unidentified Analyst

Thank you.

Unidentified Analyst

My name is [Maxine Schwartz]. I have been selling real estate in Mchenry County, D.C. and Virginia for 45 years. So I know all about the market. My question is how do you find brokers to deal with? Did they put it in a list? You have just certain brokers you deal with long and forth to add real estate, how do you get your brokers to do all these leasing for you?

George F. McKenzie

Well, there is really two categories of brokers, the brokers that represent the company and are brokers that represent the tenants. Commercial real estate unlike residential really doesn’t have quite a comprehensive MLS system. There are public companies that really the industry standard is CoStar where most properties are listed and that generally were stake is marketed electronically. Now where you find brokers is you develop relationships in the community and just know who they are.

Unidentified Analyst

Well I don’t think that’s really true because I have rented separate commercial, and I will do commercial well at that time, but I will do it for a client that are so positive and I find them in MLS. I also find then with CoStar and some of the brokers that I know around town that I’ve known for years and I’ll call them and say I need this or I need that.

George F. McKenzie

Yes.

Unidentified Analyst

I think your answer is kind of strange.

George F. McKenzie

So is my wife. They all are properties in MLS – let me give you an example, commercial project. They are smaller occupancy like we – let me give you an example. We have a residential building called the Ashby. It has some very small units in there. We might have that in MLS. I don’t know if we do. But it has 1,000 square feet units – smaller units. But you don’t risk a major commercial downtown office building in MLS. I’m just not aware of it, if it’s done. I may be a strange answer now but I’m not aware of that as being an industry practice. Are there examples of small state that are listed and announced and the most recent terms? I’m absolutely sure there are but that’s not where the majority in commercial businesses is being conducted. It’s just my experience. Yes Sir.

Unidentified Analyst

I’m [Walter Gorman]. I’m a long time shareholder. I’m having trouble following your logic of the office building segment is struggling. You are getting rid of your medical office buildings. If I understood it correctly, so if you have more money you can invest in the other office building. So what I can tell the Medical Office building section has been doing okay. What’s the sense of that?

George F. McKenzie

Certainly, I agree with your premises, our office market has been a difficult one and that our medical office portfolio has done well. I mean it’s in a good pro forma. Part of job as I mentioned in my comments, is to recognize value for you, the shareholders and we’ve made a tremendous amount of money in our Medical Office Division. So, I’m seller of that portfolio. So I’m not going to tell you anything bad about it. It’s been a tremendous performer for us and we’re very pleased with its performance over the years, but it’s a very steady performer. There’s not a lot of upside in the Medical Office Division. I want to say, it’s like a bond, but it’s a business that’s relatively flat.

And as I mentioned in my comments, in order for us to continue to growth that we are going to have to leave the area, we don’t believe that’s our expertise. The office market, we make decisions for the long-term. We really don’t make decisions on the short-term and we believe that there probably is few other markets in the world that’s better than this region long-term and we believe the [vibrant feel] long-term help to this market is strong as anywhere and the office market is one that have immense potential long-term and we want to continue to grow on that and it’s a huge market here.

Our share at the office market is fractional, I mean, we own probably 1% of the office market in this region, 400 million square foot office market in excess of actually in this region and we are $4 million square feet something like that of office space. So there’s immense room for us to grow here and has enormous growth potential. We feel that it’s a place that we’re in. And we’re not only investing in office, we’re investing in the other two sectors as well.

John P. McDaniel

Yes, sir.

Unidentified Analyst

I just want to ask a question relative to where we are looking for new opportunities. We seem to be restricting ourselves to just the local environment. Except that I notice we have one place in Hagerstown. What about Richmond, other areas such as that?

George F. McKenzie

Over the years we’ve looked to expand the radius. It’s one way of classifying it. We’ve looked in Richmond, we’ve looked in Philadelphia, we’ve looked at moving the radius out. What we found is that the rent growth in those markets it is not robust to put it mildly. You could look at space down in Richmond in the 1980s when I first started real estate. The rents are pretty close to what they were in the 1980s with very little growth in the areas like Richmond, the same for Philadelphia. Philadelphia is a great city, great city to visit, wonderful people et cetera, but if you look at office space in downtown Philadelphia there’s almost no growth. The rents that you lease space in downtown Philadelphia, it’s musical chairs. I mean, tenants just move from building to building.

So, while we’ve looked at those opportunities, we always found that the best options were our own backyard and so as times go on our focus is to become more focused and more focused inside the (inaudible) when we’ve actually reduced the circle. We thought that was in our best interest as opposed to expanding it. So while we look at things in the suburbs, particularly retail and areas with strong demographic, we’ll also look on metro stations and areas where there are some sort of barriers to entry, let’s call it, as opposed to just going into areas like Richmond or suburban locations where you can go one exit down and build a nice little mousetrap so to speak.

Now Baltimore is another area we’ve looked many times in my 17 years at WRIT, both in the City of Baltimore as well as in the suburbs. And, for example, in the office market, the Baltimore office market is perhaps one of the worst performing office markets over a 20-year period as any market in the country, rents going nowhere.

Gentlemen, over here please.

Unidentified Analyst

John Russell. Hi. I’m a stockholder of WRIT for about 45 years and have about 15,000 shares and over the years I’ve been a strong supporter and I have bailed out at the moment, but I am concerned. We seem to be emphasizing offices and there is a move towards telecommuting. We don’t what the ultimate future of the area is in terms of government offices and downsizing and so forth. So, I am a little concerned about that. I did speak three or four years ago in a meeting. I was concerned at that time when we were taking on more debt, because I remember the days when Mr. Cronin was CEO many years ago and he was very conservative of the investment community haven’t discovered WRIT, but we survived much better than all of our peers in the ‘70s when mortgage rates went up and so forth. So that’s another concern. I am glad that you have paid down some of the higher interest mortgages and with your endeavor seems to be appropriate. But, what about the other areas and are WRIT concentrating too much in the office market, and then what do you see is the likely future based on things what I referenced?

George F. McKenzie

Sure. That’s an excellent point. I mean, we share some of your concerns over some of these issues that are affecting the office market and I [agree] it’s on the telecommuting and as I referenced in my comments. So it is macro trend towards the impact technologies had with people basically working on the Internet from home. I’ve had a negative effect on all office markets throughout the country and I think that’s one of the critical elements of how we’re trying to reposition a portfolio to be in live workshop environments near barrier-to-entry locations in more efficient buildings because commodity office buildings in some respect, and I know some people would say or saying that’s asked. I mean, if you are just a 1980s brick office building now in suburbs those are enormously difficulty to lease, but what you find is there are people think that their environments where we are working and the workplace is important and it tends to be near mass transit and in urban environments where people live, work and shop as well. So and certainly look at. But we’re not excluding you, the sector. Let me just go back to that. I mean, we have a multifamily property under construction in the Boston area. It’s the only property type we actually are building anything right now. We are actively looking at shopping centers to purchase. So by no means are we excluding these other few factors. We’re working very hard to access the acquisition opportunities in both of those.

John P. McDaniel

Yes, ma’am. Sure.

Unidentified Analyst

(inaudible) Los Angeles and maybe Chicago, but I don’t even think Chicago is any good. You’re in a hot market. Why do you want to go somewhere else that you don’t know? If you’re in the hottest market around for commercial, residential, something else, again there are a lot of places to do residential, but this is the best place for office.

George F. McKenzie

Thank you.

Unidentified Analyst

Yeah. Hi, my name is [Jeff Norman]. I have owned a stock in WRIT for about 10 or 15 years now. I am wondering are we also looking at some areas for residential that historically have not been so great, but may become very hot. For instance, there is a streetcar system going on [8th Street] Union Station, not exactly historically the best area of town to live in, but I understand that property values are going way up there because of that. And there are some areas that perhaps historically have not been great areas, but it looks like there is tremendous potential.

George F. McKenzie

You’re very perceptive. You’re absolutely correct. There are areas in this city that have undergone – and while I say the city, I’m talking about the districts specifically, have undergone enormous transformation over the last 17 years and areas like you are talking about, for example, 8th Street, which few people are familiar with 8th Street, but 8th Street is a place that was somewhat of a little bit of a scary place a few years ago, but if you are 27 years old, you know where 8th Street is. It’s one of the hottest locations in town. It’s basically the street that crosses over Union Station and cuts through to east, just sort of north of Capitol Hill.

We are absolutely looking to those areas and many – you got 14th and U Street, for example, center of the (inaudible) and 60. That’s one of the hottest places to own residential properties. JBG, for example, just sold a residential empty apartment. They even have a tenant in it for $600,000 a unit. So those areas of the city are extremely hot. You have to be a little careful, because there is a lot of construction going on in those cities. But we are absolutely looking in those areas and hopefully in the next year or so, we’ll put some points on the Board and acquire something in those areas.

John P. McDaniel

I don’t think there is any further questions, John. One more…

Unidentified Analyst

(Inaudible) well, I’m a long time shareholder and I understood you to say that retail rents went up 9% as contracts were renewed.

John P. McDaniel

As leases were renewed that’s right.

Unidentified Analyst

That’s correct. You think that it’s a little excessive in today’s economic conditions I mean lot of businesses are struggling and some have closed because of those rent, and I asked about a space from my village that’s been empty now for several years precisely because of rent increases and it’s still empty, and I wonder what you are doing about those things?

John P. McDaniel

I do think 9% is good rental rate increases and I will put our leasing professional, Steve Krupinski who is sitting right behind you who is probably the guy who is the architect of that. I think Steve would tell you that, this is his job. I mean we believe it’s our obligation to achieve the highest rents we possibly can get. Now obviously, it’s extremely important that we set rent benchmarks that our tenants can survive with.

We can’t burden them with rents that where they ultimately go out of business, so there is a little bit of a balancing act there, that we have to go through. We don’t just set the highest rents we can, and they go out of business, and we have a vacancy like, you articulated in the Montgomery Village, zero is a heck of a lot less than even $2 right.

So vacancy is a huge issue, we try to push rents as much as the market will allow honestly. We believe it’s our fiduciary responsibility to achieve the best rents we possibly can, but we work with our tenants. We have a number of situations with tenants in our shopping centers, where perhaps they can’t make the rent in for a period of time, we even work with the tenants. We try to keep them in place through with some times it’s a difficult time for them. But we have to weigh our fiduciary responsibility to our shareholders as well as working with our tenants to keep them in business to provide for vibrant shopping center, which to most of the benefit of everybody including the community that they operate in. But we don’t like having vacancy trust me.

Yes, ma’am. I think that women over here and then we come back to you sir, sorry.

Unidentified Analyst

I was just wondering results that was going on in Monroe Road and [Russell pipe], is there any of kind of vision for the REIT properties there?

John P. McDaniel

Yes there is, I mean if you’re, I assume you’re a resident and you’re buying – I hopefully you’ve seen enormous progress there in that center and we bought that center from the Cohen Companies have seemed as a disaster and w knew it was a diaster, and just I guess in the last year, we opened up that new supermarket, the Mum supermarket, that center has had a tremendous turnaround and we’re very pleased where it is today.

So long-term vision for that as you’re, I think your angle here is Grosvenor area around the White Flint metro has been part of the master plan in Montgomery County, with much higher density basically you’re going to see a heck a lot of high rise condominiums. We’ve been a major participants in master planning process. I don’t know Bob Elliott is here, but someone you can talk to head of our development, we worked very closely with Montgomery County. And we have the ability and I don’t have the exact number in front of me, but we have the enormous development potential on that side over the long-term. But ultimately high-rise, multifamily over the retail. So someday, those centers will probably be straight and rebuild with high-rise multifamily retail below it, but that’s going to be a number of years from now.

Unidentified Analyst

Yeah.

John P. McDaniel

Yeah, we think it’s a great area; the road improvements have been great. Everything is going on and the White Flint master plan is extremely positive, and Montgomery County is focused on that area. So we are very bullish on it and we are very pleased with where that center is right now actually. So I think this gentlemen here have a question?

Unidentified Analyst

I wonder if you just speak a little bit about the incentive compensation plan. As I read it, my eyes sort of glaze over in terms of this complexity. And I wonder what the cost of the administration of it and cost of the consulting that must have been paid to put that together?

Secondly, exit salaries, golden parachutes it looks like there are poison pills that have been inserted now, is this something new or is this something that we should be concerned about and what’s the basis for it?

John P. McDaniel

I have to admit I will share with you some frustration over the complexity of the compensation system. I mean the compensation plans in the industry, for active, I would say that the compensation systems are incredibly complex, but I will see if I can short cut this and give you a sort of the general big picture. Basically the executives are compensated under two incentive comp plan. There is a short-term compensation plan and a long-term compensation plan. So the long-term compensation plan is a three year plan, it goes for three full years. This year, 2013 would be the third year of this long-term. We’ve gotten zero on that plan.

So at the end of this year, there will be an award, hopefully there will be an award, might be zero, based on some various performance metrics, two of which are based on stock price performance, it’s the relative and absolute stock price performance. And honestly if the stock prices move both going to be zero, but I believe they are zero at this point. Is that right, Bill?

So there are at zero. And then there is some strategic provisions in that plan that are based on your selling medical office portfolio and a bunch of different (inaudible) offset and basically graded by our compensation committee. That is the long-term plan.

And every year we have a short-term plan, which is based on FFO, FADs or individual goals and that is awarded at the end of each year. And I completely agree with you, it’s fairly complex, it’s hard to explain to people especially if they are not in it every day, but that’s sort of the big picture of those plans. In terms of the administration cycle proved various aspects to your question.

Laura tells most of the volunteer so in terms of additional internal clause I wouldn’t say its material. Now we do have an outside consultant and as any public company would, we engage Fergusson FPL Associates who is a major, I believe they are the biggest real estate compensation consultant, am I correct, am I? Yes, I am, the biggest real estate compensation consultant. They helped design the plan as well as annually they do a peer analysis, this the compensation committee wants to know that we are being paid not excessively or not below with market standards.

So every year Fergusson does a peer analysis that an independent peer – of our peers. I believe there is 20 peers and makes so there is some clause, I couldn’t tell what it is off the top of my head.

Unidentified Analyst

Salary.

John P. McDaniel

I am sorry. There have been no new change, there have been no new additions to that. There are change of control agreements, which is the industry standards. There is no, what I would classify as these [intels], but there are change of control agreement that the officers of the company have, that have been in place for a long time. Yes, sir.

Unidentified Analyst

Our philosophy in the Washington area that we would just supposedly it is a great we’ve been balanced in different areas like some apartments and shopping centers and all and that was supposed to give us a balance that we’d be great and some of them weren’t great and have to cut the dividend, but right in the area of – we’re getting more office (inaudible) like a restriction on how much like we can go over 50% or in certain areas you know like there maybe 15% apartments or something, I understand you might want to get out of shrunken area, where there are over priced, I guess the medical businesses and concentrate on other, but the restrictions on what percentage we can have in that area and are we assuming more risks or catastrophe if we are concentrated in Downtown Washington.

John P. McDaniel

Great question, we don’t have any self imposed specific hard restrictions on any asset class. We don’t have absolute lines drawn in the sand so to speak. Now we do we are very cognizant of the issues that you are talking about. I mean honestly we really don’t want to hit significantly over 50% office for a significant period of time, from time to time we’re going to go a little bit higher in different segments than we like and hopefully we rebalance it over time, but we’re very cognizant of the fact that all the different sectors provide some balance, and may hedge each other because they operate a little bit differently that they respond different effects in the marketplace. So I think it is important we’ve all these factors and we focus on, but we don’t have any hard lines in the sand, says we won’t go over this or over that in any particular segment.

Second part of that question is, do we run any risk by over concentrating. I don’t believe we do, certainly so more you’re in the city of the district you’re taking about catastrophic risk. The closer properties are together I mean we don’t know believe that’s an issue, if you have some catalyst view of the world perhaps becoming more focus on the district, you do, but no bigger trouble than if that were to see as part of the case, but I believe you’re reducing your risk by being more focus on urban environment, economic risk uncertainly personal opinion. Yes, sir.

Unidentified Analyst

The major measure one of our obvious competitors, Federal Realty and I know that there are some differences actually have some holdings on the West Coast, but I’m sure you are aware they have done extraordinarily well and I think now are number one in the number of years they’ve increased the dividend and I’m just wondering, I’m sure with – I’m wondering what the differences in their strategy anything that its leadership can look at might be worth emulating or maybe it’s I am not sure of myself that I have an understanding of the great differences, and I know it’s best to do what we know best, which obviously you are familiar with the Washington areas so not suggesting, going out to another part of the country, but have you look at their strategies and is there anything that we can learn from that would benefit WRIT?

John P. McDaniel

Federal Realty is a great company and certainly employed everything they have done over the last few years and they have a significantly different strategy than us. They are only in retail and only in one property site and of course they are geographically diversified. We are almost the flip side. We are property type diversified in cities specifically. They are nationally focused in their properties in California, Connecticut, New York, Florida in a bunch of different markets and they are only focused in retail.

They have done a great job, I mean there has been years where they have done through their cycle as well, I mean they went through their catastrophe initially with Santana Row, many people wonder what they were doing and they refocused on sort of an urban very high-end shopping centers and they have sort of come back and people go through cycles. They are at the top now. They have had a fantastic run. They have done a great job and they had their tough times as well.

They do have a completely different focus than we do in terms of strategy and there are things, what I believe you could learn things from anybody who is being successful, and I think certainly in our retail group, we could look at some of the good things they have done and learn it from them, but I mean they are not perfect either. Their dividend is less than ours, but they have done a great job and I couldn’t say anything positive things about Don Wood, and what they have done at Federal Realty.

Any other comments?

Unidentified Analyst

Okay.

John P. McDaniel

One more.

Unidentified Analyst

Real estate broker, quick question – I know that you used derivatives. In the annual report you had a section there on derivatives credit swap, will you be doing that in the future?

George F. McKenzie

We don’t have any un-hedged derivatives. I don’t believe we have any – we don’t have any outstanding derivative products on the balance sheet at all.

Unidentified Analyst

Right, going forward would you be doing that?

George F. McKenzie

Sometimes when you do finance things you do hedge derivatives. We might have floating rate debt and you buy derivative to lock in only because that happens to work financially, I don’t see us having un-hedged derivative position. Obviously, I am (inaudible) to begin the settlement, what the next guy is going to do, but we don’t as matter of business go out and take un-hedged positions, sometimes the financial market are weird and you could get fixed floating rate debt and by a swap and have the net position be lower than you could have, you just got fix rate financing but you have the hedged position, I don’t know Bill if you want to.

William T. Camp

The classic example what gets gotten by is that the term loan market where you go to a bank and get a loan. Instead of going to bond market, raising money in the bond market with a 10 year bond like Skip described before it’s 3.95%. What you do when you borrow from the bank, the bank wants it to be a variable rate interest loan. So you might get a five year loan that has variable rate interest and we as a firm because most of our revenue is contractual, you don’t want to have variability or the risk of the variability interest rates for that longer period of time.

So, what you do is you basically – synthetically put a fixed rate loan on in place. You borrow variable rate and then you put a swap in place to fix that rate. Its majority we’ve done, I mean, it’s done frequently. I would say the majority of the REIT’s that have term loans in all have that kind of mechanism in place. That’s about the only place I can think of. And right at this point of time, that wouldn’t make any sense at all to have any kind of delivery product. Thank you.

John P. McDaniel

Okay, thank you very much. G questions and dialogs. Thank you, Skip for your responses. Laura now let’s go to the voting and bring that matters to conclusion, please.

Laura M. Franklin

Okay, the polls have been closed and I’ve been informed by the Inspector of Elections as follows.

As to Proposal 1, each of the nominees for election as the Class 2 trustee has received the affirmative vote of the holders of more than 97% of the votes. Therefore each nominees has been duly elected to service Class 2 trustee until the 2016 annual meeting of shareholders and until his or hers 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, 2013 has received the favorable vote of holders of more than 98% the votes actually cast by shareholders on the matter. This proposal has therefore been approved.

Proposal 3, the advisory and non-binding vote on the company's executive compensation has received the favorable vote of the holders of more than 96% of the votes actually cast by the shareholders on the matters. Therefore this proposal has been approved. Thank you.

John P. McDaniel

Thank you, Laura. Ladies and gentlemen on behalf of the board, the staff and of all of WRIT, we want to thank you for coming today and there being no further business, this meeting is adjourned. Thank you.

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