Elme Communities (filing registrant: Washington Real Estate Investment Trust) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing describes a Washington, D.C.-area REIT owning office, multifamily and retail properties. At quarter-end it reported 49 properties, approximately 6.4 million square feet of commercial space and 4,268 multifamily units. Financial statements are unaudited.
Financial and operating results
| Metric | Q1 2018 | Prior-year comparable | Change |
|---|---|---|---|
| Rental revenue | $84.9 million | $77.5 million | +9.5% |
| Net income attributable to controlling interests | $3.3 million; $0.04 per diluted share | $6.6 million; $0.09 per diluted share | −50.3% |
| Net operating income (NOI; non-GAAP) | $55.0 million | $49.6 million | +10.8% |
| NAREIT FFO (non-GAAP) | $35.2 million | $32.7 million | +7.6% |
| Cash from operations | $36.6 million | $30.7 million | +19.4% |
| Cash used in investing | $40.7 million | $19.5 million | Use increased |
| Cash from / (used in) financing | $5.4 million | $(12.1) million | Improved |
| Cash, cash equivalents and restricted cash at quarter-end | $14.0 million | $16.6 million | — |
Real estate expenses were 35.2% of revenue, versus 36.0% a year earlier. NOI was approximately 64.8% of rental revenue, compared with 64.0%. Same-store rental revenue rose 2.6% and same-store NOI rose 2.4%; same-store ending occupancy was 93.3%, up from 93.0%. Retail same-store occupancy declined to 91.1% from 93.8%.
Total debt, including premiums and discounts and issuance costs, was $1.35 billion at March 31, 2018, compared with $1.16 billion at December 31, 2017. Balance-sheet debt carrying amounts were $1.35 billion; cash and restricted cash totaled $14.0 million. The $700 million revolving facility had $260 million drawn and $440 million available at quarter-end; availability was $428 million as of April 26. The quarterly dividend declared remained $0.30 per share. Cash dividends paid were $47.3 million.
Material changes and significant transactions
- Acquired Arlington Tower, a 396,000-square-foot office property, for a $250 million contract price. It contributed $4.6 million of rental revenue and $0.6 million of net income from acquisition through quarter-end.
- Sold Braddock Metro Center for a $93 million contract price. The sale generated $78.5 million of net cash proceeds; the filing reports no gain on sale.
- Signed an agreement to sell 2445 M Street for $100 million, with settlement anticipated during 2018. The property was classified as held for sale and incurred a further $1.9 million impairment charge in Q1, following a $24.1 million impairment in 2017.
- Refinanced and expanded credit arrangements: the revolving facility increased from $600 million to $700 million and was extended to March 2022, with two six-month extension options. A $250 million term loan maturing in July 2023 increased and replaced a prior $150 million term loan. The refinancing resulted in a $1.2 million non-cash debt-extinguishment loss.
Revenue growth and higher NOI reflected Arlington Tower and the previously acquired Watergate 600, as well as same-store NOI growth; property sales partly offset those gains. Net income fell as higher NOI was more than offset by increased depreciation and amortization, higher interest expense, the 2445 M Street impairment and the debt-extinguishment loss.
Outlook, risks and other disclosures
- No specific earnings or FFO guidance is provided. Management estimated 2018 capital requirements of approximately $85–$95 million for existing operating assets (including $30–$35 million for tenant-related costs and leasing commissions), $40–$45 million for development and redevelopment, and $31.6 million to repay or refinance secured debt. It also anticipated funding dividends and potential acquisitions, partly offset by possible disposition proceeds.
- The filing says there were no 2018 debt maturities, but expected to prepay without penalty a $32 million mortgage secured by Kenmore Apartments in Q3 2018.
- Management cited interest-rate exposure, capital availability and cost, tenant credit and leasing conditions, Washington-region economic conditions, competition, federal spending, property risks and the ability to maintain dividends among forward-looking risks. The revolving facility and other debt have financial covenants; the company reported covenant compliance at quarter-end.
- Interest-rate swaps covered $400 million of notional debt; the company estimated $1.9 million of accumulated hedge gains would be reclassified as a reduction of interest expense over the next 12 months. Derivative counterparty performance is a disclosed risk.
- The company reported no material changes to previously disclosed risk factors, no legal proceedings and no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the planned $100 million sale of 2445 M Street closed, and its final proceeds and accounting impact.
- How the Arlington Tower acquisition, Watergate 600 and asset dispositions affected recurring NOI, occupancy and leasing performance.
- Debt balances, variable-rate exposure, covenant headroom and actual availability under the revolving credit facility after quarter-end.
- Whether operating cash flow and recurring capital needs support the $0.30 quarterly dividend; Q1 cash dividends paid exceeded cash from operations.
- Actual 2018 spending on operating properties and development projects compared with management’s estimates, and the timing of the Kenmore Apartments mortgage prepayment.