Elme Communities (Washington Real Estate Investment Trust) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The registrant was named Washington Real Estate Investment Trust (WashREIT) in this filing. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and reporting period
WashREIT owned 45 properties in the greater Washington metro region: 22 multifamily properties, 15 office properties and 8 retail centers, totaling approximately 6,861 multifamily units and 3.7 million square feet of commercial space. Its reportable segments were office and multifamily. Results reflect the COVID-19 disruption and significant portfolio changes, including 2019 retail and office dispositions and the April 2020 sale of John Marshall II.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Rental revenue | $72.9 million | $76.8 million | $149.7 million | $148.3 million |
| Net operating income (NOI) | $46.0 million | $48.7 million | $94.1 million | $94.0 million |
| Net income (loss) attributable to controlling interests | $(5.4) million | $1.0 million | $(3.7) million | $(3.4) million |
| NAREIT FFO | $31.7 million | $37.5 million | $63.2 million | $71.0 million |
| Cash provided by operating activities | Not separately presented | Not separately presented | $51.2 million | $60.5 million |
Q2 rental revenue fell 5.1% year over year and NOI fell 5.5%; six-month revenue rose 0.9% and NOI was essentially flat. Q2 real estate expenses were 36.9% of revenue versus 36.6% a year earlier. Same-store ending occupancy was 90.0%, down from 92.2%; total ending occupancy was 89.4%, versus 93.2%.
Q2 diluted loss per share was $0.07, compared with income of $0.01 per share in Q2 2019. Six-month diluted loss per share was $0.05 in both periods. Dividends declared were $0.30 per share for the quarter and $0.60 for six months, unchanged year over year.
Balance sheet, cash flow and liquidity
At June 30, 2020, total assets were $2.543 billion, total liabilities $1.214 billion and total equity $1.329 billion. Cash and cash equivalents were $8.0 million, plus $0.6 million of restricted cash. Debt comprised $897.1 million of notes payable and $181.0 million drawn on the revolving credit facility; no mortgage notes remained. Total debt carrying value was approximately $1.078 billion.
The $700 million revolver had $519 million unused at June 30; on July 27, the company reported $204 million drawn and $496 million of borrowing capacity. Six-month investing cash flow was positive $12.1 million, including $56.4 million of property-sale proceeds and $25.5 million of capital improvements. Financing cash flow was negative $69.5 million, including repayment of $250 million of senior notes and $49.5 million of dividends paid.
Debt maturities included $150 million in 2021, $450 million in 2022 (assuming the stated extension option), and $431 million in 2023, including the revolver assuming extensions. The reported weighted-average debt maturity was 2.4 years. The company was in compliance with debt covenants at quarter-end and reported no debt maturities for the remainder of 2020.
Material changes and unusual items
- Q2 NAREIT FFO declined 15.3%. Management attributed the decline mainly to the absence of income from retail properties sold in 2019 and lower NOI, partly offset by lower interest expense.
- Same-store Q2 rental revenue decreased 5.5%; office revenue was down 7.7%, while multifamily revenue increased 0.5%. Management cited reduced office parking and termination-fee income, COVID-related credit losses, and lower occupancy.
- In April, WashREIT sold John Marshall II for $57 million and recognized a $6.9 million loss. It also prepaid $250 million of 4.95% senior notes without penalty, using revolver borrowings. In May, it obtained a $150 million unsecured term loan due in May 2021, with a one-year extension option.
- Interest-rate hedge fair-value losses were $36.4 million for the six-month period, recorded in other comprehensive loss; hedge liabilities were $34.5 million at June 30. The company estimated a further $7.0 million would be reclassified to interest expense over the next 12 months.
- No real estate impairment was recorded in Q2 2020. In 2019, a $8.4 million impairment was recorded on Quantico Corporate Center. Legal proceedings: none reported.
Outlook, management commentary and risks
Management said COVID-19 significantly affected Q2 operations and expected continuing adverse effects on rent collections, credit losses, leasing, rental revenue and cash flows. As of July 22, 2020, it reported collection of 97% of office, 72% of retail and 99% of multifamily Q2 cash rent, excluding contractual deferrals. It had agreed to defer $1.2 million of office, $1.0 million of retail and $0.1 million of multifamily rent. The filing does not provide a clear quantified earnings or revenue forecast; management said the future financial impact could not be reasonably estimated.
Management reduced expected 2020 capital spending by approximately $40 million, deferred some nonessential work and did not expect to begin the Riverside development in 2020. Revised full-year capital requirements included approximately $55–$60 million for existing operating assets and $30–$35 million for development and redevelopment, as well as dividends and possible acquisitions net of dispositions. The Trove development had delivered 131 units during the first half.
Principal risks include the pandemic’s effects on tenants and collections, regional economic concentration, leasing demand and occupancy, access to financing, covenant compliance, potential asset impairment, development delays and costs, and future debt refinancing. Management stated it believed liquidity was adequate for near-term needs, but warned that operating cash flows could be adversely affected.
Important facts for investors to verify
- Subsequent rent collections, deferral repayment performance, tenant credit losses and reopening conditions, particularly in retail and office.
- Occupancy, leasing volume, concessions and expirations for office space and the multifamily portfolio.
- Liquidity and covenant headroom, revolver borrowings, and refinancing plans for the 2021–2023 maturities.
- Whether operating cash flow supports the dividend and planned capital expenditures under continued pandemic-related pressure.
- Development progress and spending at The Trove and Riverside, and any further impairment or hedge-related effects.