Most of the REIT world is diversified by geography, but focused by property type. AvalonBay Communities (NYSE: AVB ) in apartments, Boston Properties (NYSE: BXP ) in offices, and Simon Property Group (NYSE: SPG ) in malls own locations across the country. In contrast, Washington REIT (NYSE: WRE ) has gone the other road by focusing geographically on the Washington, D.C., and Baltimore areas and holds a variety of property types.
It's a strategy that has worked for the company over the long term. It's certainly hard to argue with the annual dividend increases and long-term gains the company has delivered for shareholders over more than 35 years. The company's growth is currently a bit soft, but the company is by no means in any danger and has a low level of debt -- almost all of it fixed -- that offers it a fair amount of flexibility.
Washington REIT released its fourth-quarter and fiscal 2005 results last Thursday. For the full year, the company turned in funds from operations (FFO) per diluted share of $2.07, which is a slight improvement over last year's $2.05 per diluted share. That more than amply funds the company's $1.61 dividend. However, it makes more sense to look at things with respect to adjusted funds from operations (AFFO) or funds available for distribution (FAD) to adjust for maintenance capital expenditures and capitalized leasing commissions and tenant improvements. On a FAD basis, the company earned $1.54 per share, which does not cover the dividend this year, but I don't believe this is a big deal for a couple of reasons.
The first reason is that through property sales and properties in development, the company has a number of properties that should add to both FFO and FAD in the future. Another reason is that the largest portion of the company's portfolio is in the office segment, which also happens to be where the company has the most room for improvement from an occupancy perspective.
Overall Washington REIT isn't a barn burner from a growth perspective, but the company does appear to be fairly valued, considering that it trades at just 16 times trailing FFO and expects to see FFO increase by 4% to 5% next year. That's not a valuation that makes me tremble with greed, but it is attractive on a relative basis, and the company does pay a nice 5% yield in the meantime.
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