Washington Real Estate Investment Trust: Upside Potential After Dividend Cut

In July, Washington Real Estate (WRE) cut its dividend to $0.30 from$0.4375, triggered by weakness in the DC market. Here is a REIT that has cut its dividend for the first time in 50 years, but this only means that the company is being conservative and proactive. Washington RealEstate has become an interesting investment idea in the REIT space despite its dividend cut.

The stock trades around $26.50 versus its 52-week range of $25.59 – $31.25, and yields 4.52%. The chart below compares the share performance over the past year, and depicts the difference in earnings and dividends paid for the same period. “D”s mark dividends paid, and“E”s mark Earnings reported.

The company is expected to report Q3-2012 earnings on October25^th, 2012.

Upside potential after a dividend cut:

1. The dividend cut puts the company in a much better position for further investing activities. The dividend cut increases cash availability by$30-$35 million annually

2. Washington Real Estate continues to make progress in extending its short-term maturities. In Q2-2012, the company extended the maturity of its $400 million Wells Fargo credit facility from 2014 to 2016.Unsecured debt due in the next year now amounts to only $60 million,which is not a concern.

3. The company’s diversified portfolio between DC, Virginia, and Maryland provides downside protection if weakness continues in DC. We would like to note that the occupancy rate as of 6/30/2012 is 89.8% versus 90.2%last year. Given the state of the economy, still a stable relative performance.

4. The company is not close to violating any of its balance sheet covenants

5. The positive fundamental steps taken by the company could attract more yield driven investors, who are now more comfortable with the company’s fundamentals.

As of 6/30/2012, the top institutional holders of Washington Real Estate stock are The Vanguard Group (12%), BlackRock Fund (6.5%), RREEFAmerica (5.65%), Thornburg Investment Management (5%), and Invesco Advisors (3.7%)

Conclusion: A dividend cut in the case of Washington Real Estate is along-term fundamental positive, and there is further upside expected as the markets recover.

Risks related to investing in Washington Real Estate consist of a delay in the recovery of DC markets, and a short-term volatility in earnings.