Talking with Steve Monroe: Why is this man smiling?
George McKenzie has helped WRIT earn millions despite the downturn
A few weeks ago, George F. McKenzie, president and CEO of Washington Real Estate Investment Trust of Rockville, which controls multiple commercial properties in the region, was asked if any of his properties were in the mix for the Northrop Grumman headquarters bid.
He first declined comment for the record. But he then said, "Actually, from what I know about the situation, we don't really have any current vacancies of that size and it would be hard for us to assemble something of that size. ... We have the properties, but we don't have the vacancies."
As it turned out, the lack of enough options in Montgomery County for first-class real estate parcels large enough, and at the right price, wasn't good news for the county, or the state, officials said, as Northrop Grumman chose Northern Virginia, with its plethora of vacant office space.
But it's good news for McKenzie and the WRIT board that the trust's properties are so full. WRIT's occupancy percentage rates "in the low 90s," McKenzie said have helped its portfolio of about 90 properties and 11 million square feet of office space, industrial/flex properties, retail and multifamily developments produce millions in profits despite the recession.
WRIT's earnings last year were $40.7 million, up from $27.0 million in 2008, with funds from operations climbing to $121.8 million from $98.7 million in 2008.
On Jan. 8, to kick off the celebration of its 50th year in business, McKenzie, with other WRIT executives present, rang the New York Stock Exchange closing bell. In a statement, McKenzie cited the success of WRIT, the oldest publicly traded real estate investment trust success highlighted by diversification and the payment of 192 consecutive quarterly dividends at equal or increasing rates.
In first quarter 2010 results announced Thursday, WRIT, with a market capitalization of $3.1 billion, reported occupancy declined from 92.3 percent to 91.2 percent compared to a year ago, and funds from operations and net operating income were down from a year ago. McKenzie said in a statement, however, he was "pleased" with the first quarter results, and that they "met our expectations," and that the company looks forward "to potentially increasing quarters ahead."
The company said the difference in first quarter results in funds from operations compared to a year ago was due primarily to "gains on extinguishment of debt," "share dilution from our equity offerings in 2009 and 2010" and snow removal costs in the first quarter of 2010.
The Business Gazette recently talked to McKenzie, 54, a New Jersey native who first came to this area to attend the Naval Academy, about industry issues.
What's the biggest change in the industry you've seen while you've been at WRIT?
In the Washington area? Probably the biggest change we've seen is the world has become so much more institutionalized, and what you've seen since the late 1980s, early '90s, is that the era of the local developer, or large family developers, it's become harder and harder for them, and they've become less and less of a player.
And where you've seen the capital markets and the big institutions, and the REIT industry, which is the manifestation of the capital markets coming into real estate, they are such a larger portion of this business ... and the big pension funds and the insurance companies.
Speaking of that, what's your comment on federal legislation being debated on financial reform?
While I am one who is a big fan of free markets ... and excessive government intervention concerns me greatly, I believe the U.S., [even the world] economy relies so critically on a healthy banking system, and big banks in particular, that regulation is a necessity, and clearly we had a system with too much risk that broke down and needs significant remediation.
Some real estate companies and developers have fallen on hard times during the recession because of loans backed by nonperforming real estate. How has WRIT avoided this problem?
We've always been a very conservatively managed company, always been very focused on our balance sheet, and having a lot of equity in our portfolio.
We have some commercial mortgage-backed securities loans, with properties we acquired, but they are not at problem levels, they were at very low leverage levels. When these loans became available in large quantities, they encouraged people to buy more and more in greater quantities with less and less equity. WRIT has never gone down that path; we just always were much lower leveraged. We've been generally 50-50 or less leveraged. So when the market got soft, and for a period of time, you could not borrow money, no one was lending well, we had plenty of equity.
What part of your portfolio is doing the best?
Medical office buildings ... it's almost like they are always just sort of that Steady Eddie. It's not so much they are outperforming everything, it's that the other things have dropped off so much.
When do you think the commercial real estate slump is going to be over?
It's so much related to job growth really, our industry is related to job growth. When are we going to catch up? We have an economy problem, so many people lost their jobs, and everybody's really reluctant to hire folks, so that's hurting office space users, it's hurting retailers, hurting the industrial buildings because people are not storing their stuff anywhere.
So the economic variables related to job growth, that is going to survive until we really start growing jobs. And I'm not an economist but I think we're going to be in that mode for several years. I'm not convinced this is going to turn around in 2010 ... maybe we'll start seeing signs of it in late 2010, but it'll be more next year and beyond in my opinion.
So there's that force going on. Now the other factor that relates to this is sort of the issues with the overleveraged real estate out there. It's bad for people that have those mortgages ... but in some respects it's going to be good for those of us on the prowl for properties like that, like WRIT.
Would you look at, for example, anything that General Growth Properties has?
General Growth is mostly an enclosed mall operator and generally that's a little out of our wheelhouse, but they do have some strip-type centers, and we'd consider those types of properties ... and we from time to time have looked at some of them over the years. We are monitoring very closely distressed real estate in the area; we have our own hit list.
What things do you look at when deciding to buy or not?
If it's a retail center, for example, it has to be in a high-traffic area, has to have good visibility and has to have good density in the area.
What percentage of your portfolio is commercial versus residential?
We have about 14 percent multifamily, that's mostly high-rise multifamily properties, so 86 percent is various commercial activities, office.
How did you come to WRIT originally?
It was really a fortuitous accident. I was going to lunch, doing what my job was at the time, selling properties for Prudential they were liquidating properties in this area at the time and I was having lunch with a guy who was buying properties, who happened to be Tom Regnell of WRIT, who's the acquisitions guy here to this day.
He was a buyer, I was a seller, so we were just having lunch and he mentioned that WRIT was looking for someone to run their real estate operations. And it was sort of like one of those "aha" moments. I was actually headed back to New Jersey with Prudential since they were closing operations here, and had already sold my house here. But my wife was from Rockville and I went to the Naval Academy, and always liked this area, so I ended up taking the job and we stayed.
You said your proudest accomplishment here at WRIT was building a great team of people. Where or how did you learn about management and team building? Any particular mentor?
One person? I wouldn't single anybody out; there's been so many good people, both in the Navy and at Prudential. Building a team, it was probably the Navy, more than anything, you know, being in a Naval squadron, the Naval Academy, you learn that on Day One, that's what it's all about.
I flew P3s in the Navy, it's a sub-hunter ... we flew off the coast of Vietnam, and it was still hostile at the time. Our mission was to search for Soviet subs then, and I flew in Reserves, up until in the 1990s, right before the first Gulf War.
When you're in that type of situation, you live with those guys, you're plopped on some island in the Pacific with them ... you fly with them, you eat with them, you party with them. You really learn how to live 24/7 with people, you learn what makes them tick, and you learn how to survive with them. You got a lot of personalities you may or may not like, and you learn how to deal with them.
George F. McKenzie
Position: President and CEO of Washington Real Estate Investment Trust of Rockville, which has about 300 employees and invests in, manages and develops office, multifamily, medical office industrial/flex and retail properties.
Previous position: COO, WRIT; executive vice president, real estate, WRIT; vice president, investment and sales, Prudential Realty Group, Prudential Insurance Company of America.
Education: Bachelor's degree in operations analysis, Naval Academy; master's in business administration, University of Rhode Island.
Organizations: Economic Club of Washington; Urban Land Institute; National Association of Industrial and Office Properties; board of trustees, Chesapeake Lodging Trust.
Family: Wife, three children.
Hobbies: Golf, scuba diving, skiing.