Business context and reporting period
Washington Real Estate Investment Trust (Washington REIT) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The issuer describes a Washington, D.C.-area portfolio of office, retail, and multifamily properties; at quarter-end it owned 55 properties, about 7.4 million square feet of commercial space, and 2,826 multifamily units. The filing is from 2015 and identifies the registrant as Washington REIT.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and where otherwise noted.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Rental revenue | 74.2 | 72.3 | 149.1 | 140.9 |
| Net operating income (NOI) | 47.0 | 46.7 | 92.6 | 89.0 |
| Net income (loss) attributable to controlling interests | (2.5) | 1.1 | 27.0 | 105.6 |
| NAREIT FFO | 22.6 | 25.2 | 47.0 | 46.2 |
| Basic net income (loss) per share | (0.04) | 0.02 | 0.39 | 1.58 |
| Dividends declared per share | 0.30 | 0.30 | 0.60 | 0.60 |
For the six months, cash from operations was $54.3 million versus $39.1 million; investing activities provided $6.1 million versus using $7.2 million; financing activities used $53.5 million versus $139.3 million. Cash and cash equivalents were $22.8 million at June 30, 2015, with restricted cash of $13.7 million.
Total debt was $1.202 billion at June 30, 2015, down from $1.216 billion at December 31, 2014. It comprised $419.8 million of mortgages, $185.0 million drawn on credit lines, and $597.4 million of notes payable. The new $600 million unsecured credit facility had $399.5 million unused and available at quarter-end, after letters of credit; management reported covenant compliance. Total assets were $2.090 billion and total equity $814.9 million.
Material changes versus the prior comparable period
- Q2 revenue rose 2.7% and NOI rose 0.6%; six-month revenue rose 5.8% and NOI rose 4.1%. Growth reflected acquisitions and improved same-store occupancy, partly offset by dispositions and higher property costs.
- Q2 controlling-interest results shifted to a $2.5 million loss from $1.1 million income. A $5.9 million impairment on the 1225 First Street development was the main unusual charge. Q2 FFO fell 10.2% to $22.6 million.
- Six-month net income fell to $27.0 million from $105.6 million, principally because 2014 included a $106.0 million gain on the sale of medical-office properties; 2015 included a $30.3 million gain on Country Club Towers and the $5.9 million impairment.
- Same-store NOI increased 1.4% for the six months. At June 30, total occupancy was 90.0% versus 90.1% a year earlier; office occupancy improved to 87.6%, while retail fell to 92.9% and multifamily to 91.7%.
- Debt composition changed after repayment of $150 million of 5.35% notes at maturity in May, funded through credit-line borrowing. The June 23 refinancing replaced two facilities with a $600 million facility maturing in June 2019, with two possible six-month extensions.
Outlook, management commentary, risks and unusual items
- Management estimated 2015 capital needs of $55–$60 million for existing operating properties, including $30–$35 million for tenant-related capital and leasing commissions, plus $15–$20 million for development and redevelopment. Funding for possible acquisitions was expected to be offset partly by potential dispositions. No earnings or FFO guidance was provided in the supplied filing text.
- On July 1, 2015, the company completed its $167 million purchase of The Wellington, a 711-unit multifamily property and adjacent land, funded with the new credit facility. As of August 3, the stated borrowing capacity was $244.5 million.
- After quarter-end, the company signed an agreement to sell its 95% interest in the 1225 First Street joint venture for a stated $14.5 million price, following its decision not to develop the property. The related $5.9 million impairment was recorded in Q2. It also agreed to sell Munson Hill Towers for $57.1 million, with closing expected before year-end 2015.
- The company maintained a quarterly dividend of $0.30 per share, subject to board review of operating results, cash availability, REIT distribution requirements, and other factors. Management noted that a significant decline in operating cash flow could require a dividend reduction.
- Disclosed risks include credit-market conditions and cost or availability of capital, interest-rate changes, tenant and regional economic health, lease activity, property taxes, competition, federal spending changes, and maintaining REIT status. Management said interest-rate risk had not changed significantly and reported effective disclosure controls and covenant compliance. No legal proceedings or risk-factor changes were reported in the filing.
Most important facts an investor should verify
- Whether the 1225 First Street joint-venture sale and Munson Hill Towers disposition closed on the anticipated terms and how proceeds were used.
- The financial impact and lease-up progress of The Wellington, and whether post-acquisition borrowing capacity and leverage remain adequate.
- Whether occupancy and same-store NOI stabilize, especially in retail and multifamily, and whether property-tax and operating-cost increases continue.
- Whether operating cash flow and FFO support the $0.30 quarterly dividend after recurring capital spending, tenant improvements, leasing costs, and development investment.
- Credit-facility covenant headroom, refinancing needs, and exposure to variable rates and future debt maturities.