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 (“New STIP”) and new long-term incentive (“New LTIP”) plans, which were approved by the Compensation Committee and Board on February 17, 2011 and were 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.

New STIP

Under the New STIP, officers earn awards, payable 50% in cash and 50% in restricted shares, based on a percentage of salary and achieving 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 New 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 New 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.

New LTIP

Under the New LTIP, officers earn awards, payable 50% in unrestricted shares and 50% in restricted shares, based on a percentage of salary and achieving 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).

New LTIP performance is evaluated 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 New 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 New 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 New 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 New 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 New LTIP subject to market conditions.

Non-officer employees earn restricted share awards under the New 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 adoption of the New STIP and the New 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 will vest 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. With the exception of the above, no other awards under the prior LTIP were modified, and such awards continue to vest based on their applicable terms.

Prior LTIP

Other non-officer members of management earned restricted share units under the prior LTIP 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 continue to award trustees share based compensation 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, 2011, 2010 and 2009.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for all share based awards, was as follows (in millions):



	Years Ended December 31,
	2011		2010		2009
Stock-based compensation expense	$	5.6	$	5.9	$	3.5

The following is the activity for the years ended December 31, 2011, 2010 and 2009 related to our restricted share awards, excluding those subject to market conditions.

Restricted Share Awards



	2011				2010				2009
	Shares		Wtd Avg Grant Fair Value		Shares		Wtd Avg Grant Fair Value		Shares		Wtd Avg Grant Fair Value
Vested at January 1	490,832		$	30.20	423,145		$	30.24	340,920		$	29.70
Unvested at January 1	193,339		$	27.71	160,276		$	28.13	141,411		$	31.72
Granted	303,168		$	29.48	101,870		$	28.37	102,841		$	26.67
Vested during year	(161,971	)	$	29.80	(67,687	)	$	30.01	(82,225	)	$	32.44
Forfeited	(3,533	)	$	28.10	(1,120	)	$	28.45	(1,751	)	$	29.77
Unvested at December 31	331,003		$	28.39	193,339		$	27.71	160,276		$	28.13
Vested at December 31	652,803		$	30.06	490,832		$	30.20	423,145		$	30.24

The total fair value of share grants vested was as follows (in millions):



	Years Ended December 31,
	2011		2010		2009
Fair value of share grants vested	$	4.9	$	2.1	$	1.9

As of December 31, 2011, the total compensation cost related to non-vested share awards not yet recognized was $5.9 million, which we expect to recognize over a weighted average period of 29 months.

Restricted and Unrestricted Shares with Market Conditions

Stock based awards with market conditions under the New 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, 2011 was as follows (in thousands):



	Unamortized Value at December 31, 2011
	Restricted		Unrestricted
Relative TSR	$	742	$	826
Absolute TSR	$	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 following chart details the previously issued and currently outstanding and exercisable stock options:



	2011				2010				2009
	Shares		Wtd Avg Ex Price		Shares		Wtd Avg Ex Price		Shares		Wtd Avg Ex Price
Outstanding at January 1	145,950		$	26.74	314,250		$	25.39	317,000		$	25.31
Granted	—		$	—	—		$	—	—		$	—
Exercised	(51,081	)	$	25.29	(164,300	)	$	24.11	(2,750	)	$	16.34
Expired/Forfeited	(5,763	)	$	24.85	(4,000	)	$	28.23	—		$	—
Outstanding at December 31	89,106		$	27.69	145,950		$	26.74	314,250		$	25.39
Exercisable at December 31	89,106		$	27.69	145,950		$	26.74	314,250		$	25.39

The 89,106 options outstanding at December 31, 2011, all of which are exercisable, have exercise prices between $25.61 and $33.09, with a weighted-average exercise price of $27.69 and a weighted average remaining contractual life of 1.5 years. The outstanding exercisable shares at December 31, 2011 had no aggregate intrinsic value. The aggregate intrinsic value of options exercised was $0.3 million in 2011, $1.0 million in 2010 and minimal in 2009. There were minimal options forfeited in 2011 and 2010