Elme Communities (then Washington Real Estate Investment Trust): Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing is under Washington Real Estate Investment Trust, the registrant name at that time. Figures are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and period activity
The REIT owned 50 properties in the greater Washington metro area: 20 office properties, 16 retail centers and 14 multifamily properties, comprising approximately 6.4 million square feet of commercial space and 4,480 apartment units. It acquired the 293,000-square-foot Watergate 600 office property in April for a $135.0 million contract price. After quarter-end, it sold Walker House Apartments for $32.2 million and acquired the remaining 10% interest in The Maxwell joint venture for $4.1 million.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Rental revenue | $82.8 | $79.8 | $243.8 | $236.3 |
| Net operating income (NOI) | $53.2 | $50.6 | $157.6 | $150.2 |
| Net income attributable to controlling interests | $2.8 | $79.7 | $17.3 | $113.9 |
| GAAP earnings per share, diluted | $0.04 | $1.07 | $0.22 | $1.59 |
| NAREIT FFO | $35.8 | $33.0 | $105.5 | $94.3 |
| Dividends declared per share | $0.30 | $0.30 | $0.90 | $0.90 |
Q3 rental revenue increased 3.8%, NOI 5.1% and FFO 8.4% year over year. Nine-month rental revenue rose 3.2% and NOI 4.9%. Real estate expenses were 35.8% of revenue in Q3 versus 36.6% a year earlier, and 35.4% versus 36.4% for the nine-month periods. Same-store occupancy was 93.8% at quarter-end, up from 93.2% a year earlier.
GAAP earnings fell sharply against 2016 comparisons, which included $77.6 million of Q3 property-sale gains and $101.7 million for the nine-month period. 2017 results also included a $5.0 million impairment charge on Braddock Metro Center. FFO, a non-GAAP measure, excludes real estate depreciation and impairment and property-sale gains; the filing cautions that it is not cash flow or cash available for distributions.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $94.3 million, versus $85.8 million in 2016. Investing used $184.5 million, largely reflecting property acquisitions and capital investment; financing provided $90.3 million. Cash and cash equivalents ended at $11.3 million, with restricted cash of $1.4 million.
- Total debt was approximately $1.18 billion at September 30, up from $1.11 billion at December 31, 2016. Debt included $900 million of notes, $189 million drawn on the revolving credit facility and $92.7 million of mortgage principal. Balance-sheet carrying amounts are affected by premiums, discounts and issuance costs.
- The $600 million revolving facility had $189 million outstanding and $411 million unused at September 30; the filing separately reports $431 million of borrowing capacity as of October 26. The facility matures in June 2019, subject to extension options. The company reported compliance with debt covenants.
- Two $150 million term loans were effectively fixed through swaps at 2.7% and 2.9%. The filing identifies interest-rate exposure, particularly from variable-rate borrowings and refinancing.
- Nine-month dividends paid were $91.7 million, compared with $94.3 million of operating cash flow. The company declared quarterly dividends of $0.30 per share and said their continuation depends on operating results, cash availability and board review.
Management commentary, outlook and risks
Management attributed NOI growth to Watergate 600, same-store improvement and Army Navy Building, partly offset by 2016 property dispositions. Same-store rental revenue growth reflected higher rents, especially in office; management also cited increased bad-debt provisions in retail. Office lease retention was affected by a large Braddock Metro Center tenant’s non-renewal, though a replacement lease was signed and expected to begin in 2018. Retail retention was affected by a large tenant bankruptcy at Frederick Crossing.
The filing provides no specific earnings or FFO guidance. It estimated full-year 2017 investment needs of $75–$80 million for existing operating properties, including $25–$30 million for tenant-related capital and leasing commissions, and $20–$25 million for development and redevelopment, in addition to dividends and potential acquisitions. The company was negotiating a potential Braddock Metro Center sale; the property was not classified as held for sale at quarter-end, and its $5.0 million write-down relied on estimated sale proceeds. Walker House closed after quarter-end.
Disclosed risks include capital-market conditions and cost of capital, interest rates, tenant health and leasing, Washington-area economic conditions and federal spending, competing supply, real-estate ownership risks, REIT qualification, and the ability to maintain dividends. Management stated disclosure controls were effective and reported no material legal proceedings or risk-factor changes in this filing.
Important facts for investors to verify
- Whether Watergate 600’s contribution and same-store leasing and occupancy trends sustain NOI and FFO growth.
- The status, pricing and timing of a potential Braddock Metro Center sale, and the replacement tenant’s expected 2018 lease commencement.
- Post-quarter Walker House sale proceeds and the effect of the Maxwell buyout on debt, cash and ownership economics.
- Debt maturities, available revolver capacity and sensitivity to rates, including the difference between September 30 unused capacity and October 26 reported borrowing capacity.
- Dividend coverage using recurring cash needs, capital expenditures and leasing costs—not FFO alone—and the impact of share issuance on per-share results.