Business context and reporting period
This is Washington Real Estate Investment Trust’s unaudited Form 10-Q for the quarter ended March 31, 2016. The filing describes a Washington, D.C.-area REIT with office, multifamily and retail properties; the registrant name in the filing is Washington REIT. At quarter-end, it owned 54 properties: 25 office, 16 retail and 13 multifamily, totaling about 7.2 million square feet and 3,258 multifamily units.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Rental revenue | $77.1 million | $74.9 million | +3.0% |
| Net operating income (NOI) | $48.4 million | $45.6 million | +6.0% |
| GAAP net income attributable to controlling interests | $2.4 million | $29.5 million | −91.9% |
| Diluted earnings per share | $0.03 | $0.43 | Down |
| NAREIT FFO | $28.4 million | $24.4 million | +16.5% |
| Cash from operating activities | $31.5 million | $35.7 million | −11.9% |
NOI margin was approximately 62.8% of rental revenue, versus 61.0% in the prior-year quarter. Real estate expenses were 37.3% of revenue, compared with 39.0%. The 2016 quarter had no property-sale gain; Q1 2015 included a $30.3 million gain on Country Club Towers, substantially explaining the decline in GAAP earnings. FFO growth reflected higher NOI and lower interest expense. FFO is a non-GAAP measure and is not cash available for distributions.
Balance sheet, liquidity and material changes
At March 31, 2016, total assets were $2.19 billion, total liabilities $1.37 billion and total equity $815.4 million. Cash and cash equivalents were $23.6 million, with a further $9.9 million of restricted cash. Total debt was $1.29 billion: $743.5 million of notes payable, $333.9 million of mortgage debt and $215.0 million drawn on the revolving credit facility. The $600 million facility had $385 million available; its rate was one-month LIBOR plus 1.00%. The company reported compliance with debt covenants.
Debt increased by $26.1 million from year-end 2015, principally reflecting a $110 million increase in revolver borrowings, partly offset by $84.2 million of mortgage principal payments. The company purchased The Maxwell’s $32.2 million construction loan in January and prepaid the $50.9 million John Marshall II mortgage in February. Mortgage debt had a weighted-average effective rate of 5.4% and estimated weighted-average maturity of 2.1 years. A $150 million term loan was swapped to a fixed 2.7% rate through March 2021; the swaps had a $4.2 million liability at quarter-end.
Investing activities used $16.0 million, including a $12.5 million deposit for a potential acquisition. Financing activities used $15.7 million; dividends paid were $41.1 million, including payment of dividends accrued in Q4 2015. The quarterly dividend declared was $0.30 per share, unchanged from Q1 2015. The filing says operating cash flow is important to sustaining the dividend and that a significant decline could require a reduction.
Outlook, management commentary and risks
Same-store NOI rose 2.5%, mainly from higher rental rates and lower utility and snow-removal costs, partly offset by lower occupancy. Same-store physical occupancy was 91.7%, down from 92.5% a year earlier, primarily due to retail. Portfolio NOI growth also benefited from acquisitions and The Maxwell’s lease-up, partly offset by 2015 dispositions.
After quarter-end, the company agreed to sell six Maryland office properties for aggregate proceeds of $240 million, with closings expected in June and September 2016. The portfolio generated $8.4 million of Q1 2016 rental revenue and $2.7 million of net income. It also agreed to acquire Riverside Apartments, a 1,222-unit Alexandria property with adjacent land, for $244.8 million, with closing expected in Q2 2016. These transactions were pending, not completed, as of the filing.
Management identified 2016 capital needs including dividends, secured debt repayment or refinancing, portfolio investment of approximately $65–$70 million, development and redevelopment investment of approximately $10–$15 million, and acquisition funding, partly offset by potential disposition proceeds. The filing gives no formal earnings or FFO guidance. Principal stated risks include interest rates and refinancing, capital availability, tenant and regional economic conditions, leasing and occupancy, property taxes, federal spending, competition, and maintaining REIT qualification. Management reported effective disclosure controls; no legal proceedings or new risk factors were reported in this filing.
Important facts for investors to verify
- Whether the six-property sale closed on the expected timetable and at the stated aggregate price, and the resulting use of proceeds.
- Whether the Riverside Apartments acquisition closed, its financing and expected returns, and the status of the $12.5 million deposit.
- Debt maturities, refinancing or prepayment plans, revolver usage and covenant headroom against stated 2016 capital needs.
- Whether same-store occupancy—especially retail—and operating cash flow support continued NOI growth and the $0.30 quarterly dividend.
- The impact of the $4.2 million swap liability and expected $1.6 million reclassification to interest expense over the next 12 months.