TEXT-S&P cuts Washington Real Investment Trust ratings

Overview
-- Washington Real Estate Investment Trust faces soft demand for
office space in its core market, which we believe, along with near-term
refinancing of draws on revolvers and cash dilution from portfolio
repositioning, will pressure fixed-charge coverage.
-- We lowered our corporate credit and senior unsecured debt ratings on
Washington Real Estate Investment Trust to 'BBB' from 'BBB+' after revising
our assessment of the company's competitive position relative to similarly
rated peers, given its portfolio concentration and recently weaker than
expected operating performance.
-- The stable outlook reflects our expectation for modestly weaker but
still sound and relatively stable fixed-charge coverage with internal growth
in the company's multifamily and retail segments partially offsetting
operating weakness in its office portfolio.

Rating Action
On Aug. 23, 2012, Standard & Poor's Ratings Services lowered its corporate
credit and senior unsecured debt ratings on Washington Real Estate Investment
Trust (WRIT) to 'BBB' from 'BBB+'. The outlook is stable. The rating actions
affect approximately $610 million in outstanding senior unsecured notes (see
list).
Rationale
The downgrade reflects our revised assessment of the company's competitive
position relative to similarly rated peers given its portfolio concentration
and recently weaker-than-expected operating performance. We also believe soft
demand for office space in the Washington D.C., metro area, near-term
refinancing of draws on revolving credit facilities, and cash flow dilution
from portfolio repositioning will put some pressure on the company's debt
coverage measures.

Our ratings on WRIT reflect the company's "satisfactory" business risk
profile, which is characterized by a comparatively smaller and geographically
concentrated, diversified commercial real estate portfolio. Our ratings also
reflect the company's "intermediate" financial risk profile, which is
supported by moderate leverage, sound fixed-charge coverage, and adequate
liquidity.

Rockville, Md.-based WRIT is an established, but comparatively small REIT with
a market capitalization of roughly $3.0 billion. All of the company's
properties are in the high-barrier, Washington, D.C., metro area. WRIT is
unique among rated U.S. REITs in that its investment holdings are
geographically concentrated but diversified by property type. As of June 30,
2012, WRIT derived 48.5% of its net operating income (NOI) from 27 office
properties, 21.3% from 16 retail centers, 15.6% from 11 multifamily
properties, and 14.6% from 18 medical office properties. We estimate that
WRIT's five largest assets contribute about 22% of NOI and top 10 tenants
contribute 23% of annualized rent. Although WRIT's properties are older and
smaller than those of its more geographically diversified REIT peers, we
believe the majority of its portfolio is consistent in quality with competing
product. We also believe that WRIT's asset quality should continue to
gradually improve over the next few years as the company continues to
reposition its portfolio.

During the second quarter of 2012, WRIT acquired an office building in
Arlington, Va., for $52 million and was under contract to sell one medical
office building northeast of Baltimore, Md. The company is also marketing two
office buildings in Maryland and plans to commence two multifamily development
projects ($139 million estimated cost) in Northern Virginia over the next few
quarters. We anticipate that WRIT may annually pursue up to $100 million in
net acquisitions over the next two years, and we believe the company intends
to fund growth in a leverage-neutral manner. However, we note that the
company's portfolio repositioning will likely be dilutive to cash flow, given
the expected yield differential between older assets being sold (higher
yielding) and those being acquired (lower yielding).

Soft leasing conditions for office and medical office space in many of WRIT's
submarkets contributed to an overall 0.7% same-store NOI decline (on a cash
basis) during the second quarter. Similar to the first quarter, same-store
rent spreads (up 2.1%) were positive in each of WRIT's property segments but
same-store physical occupancy dipped 180 basis points (bps; to 89.3%). WRIT
leased 24% less office and 43% less medical office space during the quarter
than it averaged during the trailing four quarters, which contributed to 350
bps lower occupancy (of 84.7%) in its same-store office portfolio and 180 bps
lower occupancy (of 89.9%) in its same-store medical office portfolio. As a
result, WRIT's office and medical office portfolios posted same-store NOI
declines of 5.5% and 8.0%, respectively during the quarter. This
weaker-than-expected performance was partially offset by 16.4% NOI growth in
its same-store retail portfolio (due to 3.7% higher revenue and 24.8% lower
expense) and 2.1% NOI growth in its same-store multifamily portfolio.

We expect WRIT's office portfolio to continue to face very competitive leasing
conditions over the next two years and now estimate that the company will post
relatively flat overall same-store NOI growth through 2014. We do believe
internal growth in the company's stronger multifamily and retail segments will
partially offset NOI declines in its office portfolio. We also expect its
medical office portfolio to post flat-to-modestly positive NOI growth during
this time. Although we expect uncertainty over the federal budget to weigh on
near-term demand for office space in the Washington, D.C., metro area, we
believe longer-term fundamentals for the sector are favorable, given its
prominence as hub to myriad government agencies and related institutions.

The company's overall leverage profile has remained relatively stable over the
past few years, despite the portfolio repositioning underway: debt-to-total
capitalization is about 60% on a book-value basis and 40% on a market value
basis, respectively. As of June 30, 2012, the company's $1.26 billion of debt
had a weighted average cost of 4.9% and a tenor of 4.8 years. We note that
about 17.6% of total debt (draws on the revolving credit facilities) was
floating rate.

Under our revised base-case scenario analysis, we assume flat internal growth,
$150 million in annual leverage-neutral but modestly dilutive net external
growth, and a 5.0% debt refinancing cost over the next two years. Under this
scenario, we estimate that debt-to-EBITDA could increase modestly to the 7x
area and fixed-charge coverage could decrease to the mid 2x-area (from 6.7x
and 2.7x, respectively on a trailing-12-month basis in the second quarter of
2012). Under this scenario, we believe that coverage of the common dividend
(following the company's recent 31% dividend cut) will remain above 1.0x.
Liquidity

In our view, WRIT has adequate liquidity to cover its capital needs through
2014. We base our assessment on the following expectations and assumptions:
-- We expect liquidity sources (including cash, funds from operations
{FFO}, and revolver availability) to exceed uses by more than 1.2x through
2014;
-- We expect liquidity sources to remain positive, even if EBITDA
declines by more than 15%; and
-- Compliance with one of the tightest financial covenants could survive
a 15% drop in EBITDA.

WRIT's estimated sources of liquidity (as of June 30, 2012) include $14
million cash and $278 million availability on two recently extended revolving
credit facilities that have an aggregate capacity of $500 million (subject to
$300 million in extension options). We also estimate that WRIT will generate
between $130 million and $135 million in annual FFO and believe the recent
dividend cut should free up an estimated $35 million of capital (positioning
the company to better meet higher expected near-term tenant improvement and
leasing costs).

Estimated capital needs through 2014 include $4 million in annual principal
amortization, $20 million in annual property maintenance capital expenditures,
$80 million in annual dividend distributions, and up to $133 million in
development spend. WRIT has $60 million 5.125% senior unsecured notes that
come due on March 15, 2013, and $100 million 5.25% senior unsecured notes that
come due on Jan. 15, 2014. The company prepaid a $21 million mortgage in the
third quarter of 2012 and faces $84 million in nonrecourse mortgage debt
through 2014. We also note that the company has one property under contact for
sale and estimate that it could pursue up to $100 million in net annual
discretionary acquisitions through 2014.
Outlook
The stable outlook reflects our expectation for modestly weaker but still
sound and relatively stable fixed-charge coverage in the mid 2x area over the
next two years. We believe internal growth in the company's multifamily and
retail segments will partially offset continued operating weakness in WRIT's
office portfolio. While we ascribe a low probability to its occurrence, we
could lower the ratings if fixed-charge coverage drops below 2.2x, if coverage
of the common dividend declines below 1.0x, or if there were a stumble with
one of the development projects. An upgrade is unlikely at this time, given
our expectation for very competitive leasing conditions in the Washington,
D.C., metro area office sector.
-- Related Research And CriteriaIndustry Economic And Ratings Outlook:
North American REIT Ratings Will Likely Remain Stable Despite Slowing Economic
Growth, July 27, 2012
-- Issuer Ranking: North American REITs, Strongest To Weakest, July 26,
2012
-- Credit FAQ: How Standard & Poor's Applies Its Liquidity Descriptors
For Global Corporate Issuers To North American Real Estate Companies, Oct.12,
2011
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies,
June 21, 2011
Ratings List
Rating Lowered
To From
Washington Real Estate Investment Trust
Corporate Credit Rating BBB/Stable/-- BBB+/Stable/--

Washington Real Estate Investment Trust
Senior Unsecured BBB BBB+