As a dividend lover, I once happily owned WashREIT (NYSE: WRE), back when it preferred to go by its full name, Washington Real Estate Investment Trust. The key reason was the real estate investment trust's (REIT's) impressive history of annual dividend increases. In 2012, however, everything started to change and I ended up selling my stake. Watching what has happened since that point, I'm glad I did. Here's a look at what's been going on.
The name Washington was once very important in this real estate investment trust's name because its portfolio was centered around Washington, D.C. Essentially, management believed that the U.S. seat of power represented a unique investment opportunity because it resulted in a fairly stable business environment across multiple different property types. Indeed, while not geographically diversified, Washington Real Estate Investment Trust had its fingers in multiple different property sectors, including office, retail, industrial, apartment, and healthcare.
The decades worth of annual dividend increases it had under its belt seemingly proved its model had legs. But in 2012 something big happened: The REIT cut its dividend by 31%.
In the news release explaining that bad news, George F. "Skip" McKenzie, the company's president and chief executive officer, said, "We expect aligning our dividend payment to more closely approximate taxable income will create a catalyst for successful execution of our strategic plan."
That plan was to slim down the portfolio by getting out of some of the property sectors in which it had long operated. I held on for a little bit, figuring I'd wait and see where the company was going.
The industrial business was first to go in 2011, before the dividend reset. Washington REIT had always been a fairly active portfolio manager, buying and selling assets opportunistically, so I rolled with that one. After the dividend cut, the company trimmed the healthcare business in 2013. I was surprised by that move, given that I thought healthcare was a solid avenue for growth. That sale, meanwhile, left just three main property types: office, apartment, and retail. I didn't like the direction things were going, and needed some cash anyway, so I sold the stock.
The holding pattern
The overall goal, as I understood it, was to get Washington REIT back on the growth track, but the dividend never budged after the cut. And, over the past year, it looks like WashREIT, as it is now prefers to be called, has decided to change gears again, selling off its office properties and planning to jettison its retail assets. That will turn this once-diversified REIT into an apartment REIT.
The latest moves are being hailed as the completion of the company's "transformation into a multifamily REIT," according to the press release. Only this process started roughly a decade ago, and it's hard to believe that becoming an apartment-only REIT took this long to achieve. It's more likely that WashREIT has lacked a coherent direction over the past 10 years and has just recently decided that housing demand is high, so, well, that's a good place to focus. That's not exactly a bad call, but the path to this point should probably worry conservative investors. It hints at a REIT that's been a little directionless.
The goal from here is to have about 60% of the apartment portfolio located in and around Washington, D.C. (mostly Virginia). The rest will come from the Southeast. This makes a fair amount of sense, given that Southern states have been seeing an influx of people looking to escape the cold of the North. This transition, however, anticipates the proceeds from the office and retail dispositions going toward apartment acquisitions and debt reduction.
Here's the problem: The dividend wasn't talked about in the presentation deck outlining this transition, so there's no indication of what to expect there. But the REIT is basically selling half of its portfolio and all of the cash flow that goes along with it. The last time it started to sell assets in mass quantity, it cut the dividend to "align" the payment with its new goals and "more closely approximate taxable income," according to McKenzie.
This round of change is even bigger and is happening extremely quickly, so investors should probably brace themselves for a potential dividend cut here, too. Nothing has been announced, and maybe the REIT can put money to work quickly and reduce leverage enough to muddle through this transition without trimming the dividend. But prudence suggests that caution is in order.
A whole new REIT
WashREIT bears no resemblance to the company it once was. That might be good; it might be bad. It's really too soon to tell, given that the new direction is likely to focus the REIT on a desirable property type. However, dividend investors have been let down over the past decade as Washington REIT transformed into WashREIT. And the disappointing dividend news might not be over now that property type diversification is being dropped as a key corporate goal.