Business context and reporting period
Washington Real Estate Investment Trust (Washington REIT), the predecessor name of Elme Communities, filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company owned office, multifamily and retail properties in the greater Washington, D.C. region. At quarter-end, its portfolio comprised 49 properties, approximately 6.0 million square feet of commercial space and 4,480 multifamily units. The filing reports results for the three months ended March 31, 2017, compared with the same period in 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Real estate rental revenue | $77.5 million | $77.1 million | Up 0.5% |
| Real estate expenses | $27.9 million | $28.7 million | Down 3.0% |
| Net income attributable to controlling interests | $6.6 million | $2.4 million | Up 178.3% |
| Basic and diluted EPS | $0.09 | $0.03 | Up $0.06 |
| NOI, a non-GAAP measure | $49.6 million | $48.4 million | Up 2.6% |
| NAREIT FFO, a non-GAAP measure | $32.7 million | $28.4 million | Up 15.0% |
| Net cash provided by operating activities | $31.0 million | $32.3 million | Down 3.8% |
Real estate expenses were 36.0% of rental revenue, compared with 37.3% a year earlier. Same-store ending occupancy rose to 93.7% from 90.5%; total portfolio occupancy was 93.5%, versus 90.6%.
At March 31, 2017, cash and cash equivalents were $15.2 million and restricted cash was $1.4 million. Total debt, including mortgage notes, lines of credit and notes payable, was $1.114 billion. The revolving facility had $123.0 million drawn and $477.0 million unused and available at quarter-end. The company reported compliance with its debt covenants.
Cash used in investing activities was $15.0 million; cash used in financing activities was $12.1 million. Dividends declared were $0.30 per share, unchanged year over year. Cash dividends paid were $45.0 million, exceeding quarterly operating cash flow of $31.0 million.
Material changes versus the prior comparable period
- Net income rose primarily because interest expense fell by $3.0 million and Riverside Apartments, acquired in Q2 2016, contributed additional income.
- NOI increased $1.2 million. Same-store NOI grew $4.2 million and Riverside added $3.1 million, partly offset by $5.3 million of NOI lost from 2016 property sales and lower occupancy at the Army Navy Building redevelopment.
- NAREIT FFO increased $4.3 million, reflecting lower interest expense and higher NOI. These supplemental measures are not substitutes for GAAP net income or operating cash flow.
- Rental revenue increased only 0.5% overall, as same-store growth and the Riverside acquisition were largely offset by dispositions. Same-store rental revenue increased 6.2%, led by office properties.
- Interest expense declined 20.6% to $11.4 million, principally due to repayment of mortgage debt; expense on notes payable rose after term-loan borrowings.
- The company issued approximately 1.0 million shares through its equity distribution program for $30.0 million net proceeds. Weighted-average basic shares increased to 74.9 million from 68.3 million.
Outlook, management commentary, risks and unusual items
- After quarter-end, on April 4, the company acquired Watergate 600, a 309,000-square-foot Washington, D.C. office building, for approximately $135.0 million, primarily funded with revolver borrowings. It had also raised $34.1 million through additional share issuance after quarter-end.
- Planned 2017 capital needs included $85–$90 million for the operating portfolio and $40–$45 million for development and redevelopment, in addition to dividends and possible acquisition spending. The filing says there were no other 2017 debt maturities; the $49.6 million Army Navy Building mortgage was prepaid in February without penalty.
- Development and redevelopment activity included the Army Navy Building, The Trove multifamily project, land adjacent to Riverside Apartments and Spring Valley Village retail. Management expected the remaining Army Navy Building work to be placed in service in Q2 2017.
- Management cited risks including interest rates and capital availability, tenant and regional economic health, federal government spending, competition, real estate ownership risks, REIT qualification and the ability to maintain dividends. The filing provides no specific earnings or FFO guidance.
- Interest-rate swaps fixed rates on two $150 million term loans at 2.7% and 2.9%. The company estimated that $0.5 million of hedge-related accumulated gains would be reclassified as an increase to interest expense over the next 12 months.
- The company adopted new acquisition accounting guidance early; Watergate 600 was treated as an asset acquisition, with $0.6 million of related costs capitalized as of quarter-end. No properties were sold or classified as held for sale in Q1 2017.
- Management reported effective disclosure controls, no material change in internal control over financial reporting and no legal proceedings. The filing reported no off-balance-sheet arrangements reasonably likely to have a material effect.
Important facts for investors to verify
- Confirm post-acquisition debt, revolver availability and funding mix after the $135 million Watergate 600 purchase and subsequent equity issuance.
- Assess whether operating cash flow can support the $0.30 quarterly dividend alongside planned capital spending; cash dividends paid exceeded Q1 operating cash flow.
- Track occupancy, leasing costs and rent growth, particularly office leasing and the Army Navy Building redevelopment.
- Review same-store NOI and FFO definitions and reconciliations, and distinguish these non-GAAP measures from GAAP earnings and cash flow.
- Monitor debt covenants, refinancing needs, floating-rate exposure and the effect of property investment and dispositions on leverage and liquidity.