Filing Summary
Business context and reporting period
This is Washington Real Estate Investment Trust’s Form 10-K for the fiscal year ended December 31, 2015, filed February 26, 2016. The filing is for Washington REIT, not a company identified as Elme Communities. Washington REIT owned 54 properties in the greater Washington, D.C. region: office, multifamily and retail assets. Its strategy was to sell assets with limited growth prospects and reinvest in acquisitions and redevelopment.
Key financial and operating metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Real estate rental revenue | $306.4 million | $288.6 million |
| Net operating income (NOI) | $194.2 million | $184.9 million |
| NOI as a share of rental revenue | 63.4% | 64.1% |
| Net income attributable to controlling interests | $89.7 million | $111.6 million |
| NAREIT funds from operations (FFO) | $108.5 million | $101.1 million |
| Cash provided by operating activities | $107.4 million | $80.7 million |
| Total debt at year-end | $1.266 billion | $1.210 billion |
| Cash and cash equivalents at year-end | $23.8 million | $15.8 million |
| Dividends declared per share | $1.20 | $1.20 |
Revenue increased 6.2%, NOI increased 5.0%, FFO increased 7.3%, and operating cash flow rose $26.7 million. NOI growth reflected acquisitions, improved same-store results and The Maxwell entering service, partly offset by dispositions. Same-store rental revenue rose 1.7%, while same-store NOI rose 0.5%; same-store occupancy declined 1.5 percentage points to 91.8%. Reported net income fell 19.6%, mainly because 2014 included larger property-sale gains; 2015 included $91.1 million of continuing-operations gains on sale and a $5.9 million impairment charge.
At December 31, 2015, the portfolio was 90.2% occupied overall; office, multifamily and retail leased rates were 92%, 96% and 95%, respectively. The filing reports $479.5 million of unused availability under the $600 million credit facility at year-end, after outstanding borrowings and letters of credit. As of February 22, 2016, it reported $412.0 million of facility availability and $14.1 million in cash. Debt to total consolidated market capitalization was approximately 42% as of that date. The $150 million term loan was effectively fixed at 2.7% through March 2021 via swaps.
Material changes versus the prior period
- Rental revenue rose from $288.6 million to $306.4 million, while real estate expenses grew faster, increasing 8.2% to $112.2 million.
- Net income was lower despite improved recurring operating measures, chiefly because sale gains were $91.1 million in 2015 versus $106.6 million in 2014, including $106.0 million from discontinued operations in 2014.
- Washington REIT acquired The Wellington, a 711-unit multifamily property, for a contract price of $167.0 million. It sold Country Club Towers, Munson Hill Towers and Montgomery Village Center and sold its interest in the 1225 First Street joint venture.
- It replaced two credit lines with a $600 million unsecured facility and added a $150 million term loan; total debt increased about $55.9 million year over year.
- Operating cash flow increased, while investing cash use narrowed to $93.0 million, reflecting lower development and redevelopment spending.
Outlook, risks and unusual items
- Management expected steady to improved performance across segments in 2016, citing forecast regional job growth. It anticipated approximately $250 million of asset sales, primarily suburban office properties.
- 2016 capital needs included approximately $65–$70 million for existing operating assets, $10–$15 million for development and redevelopment, and about $32 million of tenant-related capital improvements. Management expected to address approximately $160 million of 2016 mortgage maturities using property-sale proceeds and credit-facility borrowings; it also identified a $101.9 million 2017 mortgage that could be prepaid without penalty in October 2016.
- Key risks include geographic concentration in the Washington region, office-market leasing and vacancy trends, exposure to federal spending and government contractors, tenant renewals and leasing costs, interest-rate and refinancing risk, and execution and funding risk for development and redevelopment. Direct federal-government tenants accounted for less than 1% of 2015 rental revenue, but management noted indirect exposure through contractors and the regional economy.
- The $5.9 million impairment related to the decision not to develop 1225 First Street; the related joint-venture interest was sold for $14.5 million. A $1.4 million gain was also recorded on land taken through eminent domain. The company reported no material off-balance-sheet arrangements and no legal proceedings; management said ordinary-course claims were not expected to have a material adverse effect.
- The company reported compliance with debt covenants at year-end and effective disclosure and internal financial reporting controls. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is Washington REIT’s FY 2015 10-K, not an Elme Communities filing, and does not represent a standalone 2015 fourth-quarter report.
- Review the drivers and sustainability of same-store growth, particularly the 0.5% NOI increase, occupancy changes, leasing incentives and tenant improvement spending.
- Reconcile reported net income with recurring performance measures, including the impact of disposition gains and the 1225 First Street impairment; FFO is a non-GAAP measure and is not cash available for distributions.
- Assess debt maturities and liquidity against planned asset sales, 2016 capital requirements and the facility’s covenant and borrowing conditions.
- Evaluate the 2016 sale outlook and the regional office exposure, including the lease-expiration schedule and indirect dependence on government-related employment.