Annual report pursuant to Section 13 and 15(d)

Stock Based Compensation

v2.4.0.6
Stock Based Compensation
12 Months Ended
Dec. 31, 2012
Share-based Compensation [Abstract]  
Stock Based Compensation
STOCK BASED COMPENSATION

WRIT maintains short-term and long-term incentive plans that allow for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2007 Omnibus Long-Term Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options, and other awards up to an aggregate of 2,000,000 shares over the ten year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares.

WRIT's Compensation Committee conducted an extensive review of our executive compensation philosophy and a fundamental redesign of our short-term and long-term incentive plans for our officers, resulting in new short-term incentive (“STIP”) and new long-term incentive (“LTIP”) plans, which were approved by the Compensation Committee and Board of Trustees on February 17, 2011 effective as of January 1, 2011. In addition, the Compensation Committee approved a new long-term incentive plan for non-officer employees as of January 1, 2011, with minimal changes from the prior long-term incentive plan for non-officer employees.

Short-Term Incentive Plan

Under the STIP, officers earn awards, payable 50% in cash and 50% in restricted shares, based on a percentage of salary and the achievement of various performance conditions within a one-year performance period (except for 15% of such restricted share awards which will be exclusively service-based). With respect to the 50% of the STIP award payable in restricted shares, (i) the restricted shares subject to performance conditions will vest over a three-year period commencing on the January 1 following the end of the one-year performance period, and (ii) the restricted shares subject only to a service condition will vest over a three -year period commencing at the beginning of the one-year performance period.

With respect to the 50% of the award payable in cash, the officer may elect to defer up to 80% of the cash portion pursuant to WRIT's deferred compensation plan for officers. If the officer makes such election, the cash will be converted to restricted share units and WRIT will match 25% of deferred amounts in restricted share units.

For the service based awards, we recognize compensation expense based on the grant date fair value, ratably over a three-year period commencing with the start of the performance period. With respect to the restricted shares subject to performance conditions expected to be awarded under the STIP at the end of the one-year performance period, we recognize compensation expense based on the current fair market value of the probable award until the performance condition has been met, according to a graded vesting schedule over a four-year period commencing with the date the performance targets were established. Approximately 20% of the restricted shares subject to performance conditions awarded by the Compensation Committee at the end of the one-year performance period are based on subjective strategic acquisition and disposition goal criteria, for which we recognize compensation expense when the grant date occurs at the end of the one-year period through the three-year vesting period.

Long-Term Incentive Plan

Under the LTIP, officers earn awards, payable 50% in unrestricted shares and 50% in restricted shares, based on a percentage of salary and the achievement of various market and performance conditions during a defined three-year performance period (e.g., commencing on January 1, 2011 and concluding on December 31, 2013).

LTIP performance is evaluated based on objective and subjective performance goals and weightings. Of the officers' total potential award, 40% is subject to market conditions based on absolute total shareholder return (“TSR”) and relative TSR. The remaining 60% of the award is based primarily on strategic plan fulfillment, evaluated and determined by the Compensation Committee in its discretion at the end of the three-year performance period.

The unrestricted shares vest immediately at the end of the three-year performance period, and the restricted shares vest over a one-year period commencing on the January 1 following the end of the three-year performance period.

With respect to the 40% of the LTIP subject to market conditions, we recognize compensation expense ratably (over three years for the 50% unrestricted shares and over four years for the 50% restricted shares) based on the grant date fair value, as determined using a Monte Carlo simulation, and regardless of whether the market conditions are achieved and the awards ultimately vest. With respect to the 60% subjective portion of the LTIP, we will recognize compensation expense for the 50% unrestricted shares when the grant date has occurred at the end of the three-year performance period. We will recognize compensation expense for the 50% restricted shares over the one-year vesting period commencing upon the grant date at the end of the three-year performance period.

We use a binomial model which employs the Monte Carlo method as of the grant date to determine the fair value of the 40% of the LTIP subject to market conditions referenced above. The market condition performance measurement is the cumulative three-year total shareholder return on both an absolute basis (50% weighting) and relative to a defined population of 20 peer companies (50% weighting). The model evaluates the awards for changing total shareholder return over the term of the vesting, on an absolute basis and relative to a peer companies, and uses random simulations that are based on past stock characteristics as well as income growth and other factors for WRIT and each of the peer companies. The assumptions used to value the 40% of the LTIP subject to market conditions were an expected volatility of 58.1%, a risk-free interest rate of 1.2% and an expected life of 3 and 4 years.  We based the expected volatility upon the historical volatility of our daily closing share price. The price at the grant date, February 17, 2011, was $30.91. We based the risk-free interest rate used on U.S. treasury constant maturity bonds on the measurement date with a maturity equal to the market condition performance period. We based the expected term on the market condition performance period. The officers' total award opportunity under the new LTIP stated as a percentage of base salary ranges from 65% to 150% at target level. The calculated grant date fair value as a percentage of base salary for the officers ranged from 79% to 185% for the 40% of the LTIP subject to market conditions.

Non-officer employees earn restricted share awards under the LTIP based upon various percentages of their salaries and annual performance calculations. The restricted share awards vest ratably over three years from the grant date based upon continued employment. We recognize compensation expense for these awards according to a graded vesting schedule over four years from the date the performance target was established.

Modification of Prior LTIP Awards

In connection with the January 1, 2011 adoption of the STIP and the LTIP, the previous long-term incentive plan ("prior LTIP") for officers was amended such that awards subject to performance and market conditions through 2012 under the prior LTIP were converted when the new plans were adopted into 154,400 restricted share units as of February 17, 2011, of which 59,100 were previously granted and unvested as of December 31, 2010. Such restricted share units vested consistent with the periods in which they otherwise would have vested under the terms of the prior LTIP (i.e., either December 31, 2011 or December 31, 2012). We accounted for the amendment of these awards as a modification.

Prior LTIP

Other non-officer members of management earned restricted share units under the prior LTIP (before January 1, 2011) based on one-year performance targets that vest ratably over five years from the grant date based upon continued employment. We recognize compensation expense for these awards according to a graded vesting schedule over six years from the date the performance target was established.

Officers earned restricted share units under the prior LTIP based on various percentages of their salaries that vest ratably over five years from the grant date based upon continued employment. We recognize compensation expense for these awards ratably over five years from the grant date.

Trustee Awards

We award share based compensation to our trustees on an annual basis in the form of restricted shares which vest immediately and are restricted from sale for the period of the trustees' service. The value of share-based compensation for each trustee was $55,000 for each of the years ended December 31, 2012, 2011 and 2010.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for the three years ended December 31, 2012 for all share based awards, was as follows (in thousands):
 
Year Ended December 31,
 
2012
 
2011
 
2010
Stock-based compensation expense
$
5,856

 
$
5,597

 
$
5,852


Restricted Share Awards
The activity for the three years ended December 31, 2012 related to our restricted share awards, excluding those subject to market conditions, was as follows:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
Shares
 
Wtd Avg Grant Fair Value
 
Shares
 
Wtd Avg Grant Fair Value
 
Shares
 
Wtd Avg Grant Fair Value
Vested at January 1
652,803

 
$
30.06

 
490,832

 
$
30.20

 
423,145

 
$
30.24

Unvested at January 1
331,003

 
28.39

 
193,339

 
27.71

 
160,276

 
28.13

Granted
36,884

 
26.40

 
303,168

 
29.48

 
101,870

 
28.37

Vested during year
(211,485
)
 
28.39

 
(161,971
)
 
29.80

 
(67,687
)
 
30.01

Forfeited
(6,599
)
 
27.61

 
(3,533
)
 
28.10

 
(1,120
)
 
28.45

Unvested at December 31
149,803

 
27.37

 
331,003

 
28.39

 
193,339

 
27.71

Vested at December 31
864,288

 
29.65

 
652,803

 
30.06

 
490,832

 
30.20


The total fair value of share grants vested for the years ended December 31, 2012, 2011 and 2010 was $5.6 million, $4.9 million and $2.1 million, respectively.
As of December 31, 2012, the total compensation cost related to non-vested share awards not yet recognized was $2.4 million, which we expect to recognize over a weighted average period of 17 months.

Restricted and Unrestricted Shares with Market Conditions

Stock based awards with market conditions under the LTIP were granted in February 2011 with fair market values, as determined using a Monte Carlo simulation, as follows (in thousands):
 
Grant Date Fair Value
 
Restricted
 
Unrestricted
Relative TSR
$
1,066

 
$
1,066

Absolute TSR
365

 
365



The unamortized value of these awards with market conditions as of December 31, 2012 and 2011 was as follows (in thousands):
 
December 31,
 
2012
 
2011
 
Restricted
 
Unrestricted
 
Restricted
 
Unrestricted
Relative TSR
$
501

 
$
338

 
$
742

 
$
826

Absolute TSR
172

 
116

 
254

 
283



Options
The previous option plans provided for the grant of qualified and non-qualified options. The last option awards to officers were in 2002, to non-officer key employees in 2003 and to trustees in 2004. Options granted under the plans were granted with exercise prices equal to the market price on the date of grant, vested 50% after year one and 50% after year two and expire ten years following the date of grant. Options granted to trustees were granted with exercise prices equal to the market price on the date of grant and were fully vested on the grant date. We accounted for option awards in accordance with APB No. 25, and we have recognized no compensation cost for stock options.
The previously issued and currently outstanding and exercisable stock options for the three years ended December 31, 2012 was as follows:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
Shares
 
Wtd Avg
Ex Price
 
Shares
 
Wtd Avg
Ex Price
 
Shares
 
Wtd Avg
Ex Price
Outstanding at January 1
89,106

 
$
27.69

 
145,950

 
$
26.74

 
314,250

 
$
25.39

Granted

 

 

 

 

 

Exercised
(44,987
)
 
25.61

 
(51,081
)
 
25.29

 
(164,300
)
 
24.11

Expired/Forfeited
(6,000
)
 
25.61

 
(5,763
)
 
24.85

 
(4,000
)
 
28.23

Outstanding at December 31
38,119

 
30.48

 
89,106

 
27.69

 
145,950

 
26.74

Exercisable at December 31
38,119

 
30.48

 
89,106

 
27.69

 
145,950

 
26.74


The options outstanding at December 31, 2012, all of which are exercisable, have exercise prices between $29.55 and $33.09, with a weighted-average exercise price of $30.48 and a weighted average remaining contractual life of 1.2 years. The outstanding exercisable shares at December 31, 2012 had no aggregate intrinsic value. The aggregate intrinsic value of options exercised was $0.1 million, $0.3 million and $1.0 million in the years ended December 31, 2012, 2011 and 2010, respectively. There were no options forfeited in the years ended December 31, 2012 and 2011. 3,350 options were forfeited in 2010.