Real estate investment trusts (REITs) tend to have a well-defined strategy. Most are pure-play REITs focused on either a specific property type or a particular region. That's the case for Washington Real Estate Investment Trust (NYSE: WRE), or WashREIT, which, as the name implies, is a pure-play REIT focused on Washington, D.C.
However, that focus is about to change. The REIT is pivoting its strategy from concentrating on one city to a specific type of property. Here's a closer look at the company.
WashREIT entered 2021 as a diversified REIT focused on the Washington, D.C. metro area. The company-owned and operated 22 multifamily properties with 7,059 apartment units. In addition, it had 3.4 million square feet of commercial space across 13 office properties and eight retail centers.
However, in mid-June, the company unveiled a plan to accelerate its plan to transform into a residential REIT focused on multifamily properties across the Southeast. By the end of the second quarter, the company had closed the sale of most of its office properties and had a contract to sell its retail centers. It still had one office property remaining -- the iconic Watergate 600 building in Washington, D.C. -- that it intends to sell in the future.
At that time, its portfolio consisted of:
- Class A multifamily: High-quality apartments that generally rent for above-market average rates -- 13%.
- Class B multifamily: More affordable apartments -- 20%.
- Class B value-add multifamily: Pre-renovated apartments -- 62%.
- Office space: Watergate 600 makes up the final 5% of its portfolio.
The company owned multifamily units across the Washington, D.C. area, including in the capital (14% of its geographic mix), Northern Virginia (76%), and Maryland (10%).
In the future, it anticipates that 100% of its portfolio will be multifamily properties. Meanwhile, it sees the mix shifting south to be 60% in the capital region (Virginia, Maryland, and Washington, D.C.) and 40% across the Southeast (Atlanta and Raleigh/Durham and Charlotte, North Carolina).
The pandemic weighed on WashREIT's results in 2020. The REIT's same-store net operating income (NOI) declined by 5.4% due to lower rental income and higher credit losses, primarily in its office and retail portfolios. Meanwhile, lease rates fell in its multifamily portfolio as renters opted to take advantage of lower interest rates to buy a home, or they took advantage of their ability to work remotely and moved to cheaper areas outside of the Washington, D.C., area.
The REIT continued its portfolio transformation in 2020. It completed the sale of three office assets for a total of $163.5 million. It used those proceeds to strengthen its balance sheet.
WashREIT accelerated its portfolio transition to a multifamily REIT in the first half of 2021. In mid-June, the company agreed to sell all but one of its remaining office buildings to a private real estate investment fund managed by Brookfield Asset Management. Overall, it sold 12 office assets in the Washington, D.C., metro area with nearly 2.4 million square feet for $776 million. It retained Watergate 600, which it intends to sell when practical. In addition, the REIT agreed to sell its eight remaining retail assets to another buyer for $168.3 million. The company plans on using those proceeds to reduce debt and finance its multifamily expansion strategy across the Southeast.
The REIT also noted an improvement in its multifamily portfolio in early 2021. New lease rates jumped 10% in June and July compared to the prior-year period. Meanwhile, occupancy rose from 95.2% to 95.8%. WashREIT also saw strong leasing activity at the recently completed Trove development, bringing occupancy to more than 75%. That has it on schedule to stabilize the property by year's end, well ahead of its May 2022 target.
WashREIT stock price
WashREIT's portfolio transformation has weighed on its stock price in recent years: