Elme Communities quarterly report, Q2 FY2014

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, 2014. The filing describes a portfolio focused on the greater Washington, D.C. region: 54 properties, including 25 office properties, 16 retail centers and 13 multifamily properties, plus land held for development. The filing is under Washington REIT’s name, not Elme Communities.

Financial and operating performance

• Q2 revenue rose 9.6% and NOI rose 10.6%; management attributed NOI growth to acquisitions and improved same-store occupancy and rental rates. Same-store occupancy reached 92.6%, compared with 90.0% a year earlier.
• Q2 net income and FFO declined year over year. Six-month net income included a $106.0 million gain from the Medical Office Portfolio sale; the gain makes reported earnings and EPS less indicative of recurring operations.
• Real estate expenses were $25.5 million in Q2, up 7.8%; depreciation and amortization rose 16.0% to $24.4 million. Interest expense fell 5.3% to $15.0 million.
• At June 30, cash and cash equivalents were $23.0 million, down from $130.3 million at year-end 2013. Total debt was $1.154 billion, versus $1.141 billion; debt comprised $747.0 million of notes and $407.0 million of mortgages. No line-of-credit borrowings were outstanding.
• Two revolving credit facilities provided $500 million of undrawn capacity. The company reported compliance with its debt covenants. Total equity was $824.6 million.
• Dividends declared were $0.30 per share for the quarter and $0.60 for the six-month period, unchanged from 2013.

Material changes versus the prior comparable period

• Rental revenue growth reflected acquisitions and higher same-store performance. Q2 same-store NOI rose 6.1%; six-month same-store NOI rose 2.9%.
• Washington REIT completed the Medical Office Portfolio sale in January 2014, following earlier closings in 2013. The final 2014 transactions generated $193.6 million in contract sales proceeds and a $106.0 million gain.
• Three acquisitions were completed in 2014: Yale West, The Army Navy Club Building and 1775 Eye Street, NW, at aggregate contract purchase prices of $256.5 million. The acquisitions included $100.9 million of assumed mortgages.
• Operating cash flow fell 37.9% to $39.1 million for the half year, primarily reflecting the loss of income from properties sold and higher acquisition costs. Cash used in financing increased, including repayment of $100 million of unsecured notes.

Outlook, commentary and risks

• Management estimated 2014 investment needs of approximately $70–$75 million for existing operating properties, including $38–$42 million for tenant-related costs and leasing commissions, and $45–$50 million for development and redevelopment. Potential acquisitions were expected to be offset in part by property-sale proceeds.
• No debt maturities were scheduled for the remainder of 2014. Management expected 2014 capital requirements to include dividends and ongoing portfolio investment; it cautioned actual requirements could differ materially.
• The $35 million renovation of 7900 Westpark Drive was expected to be completed in Q1 2015. The Maxwell multifamily development was expected to be completed in Q4 2014. Construction at 1225 First Street remained delayed as the company reassessed market conditions and oversupply concerns.
• Risks cited include capital availability and cost, interest rates, tenant and regional economic health, leasing activity, competing supply, Federal government spending, regulatory matters and weather. The company noted that operating cash flows are important to sustaining the dividend and a significant decline could require a reduction.
• After quarter-end, on August 4, 2014, the board adopted an executive-officer severance plan providing qualifying officers with severance pay and certain benefits.
• The company early adopted the revised discontinued-operations standard in Q1 2014. It was evaluating the impact of the new revenue standard, which was not yet effective.
• The filing reported no legal proceedings, defaults on senior securities or material changes to internal control over financial reporting. Disclosure controls were deemed effective.

Important facts for investors to verify

• Confirm the filing entity and reporting-period mapping: this 2014 report is filed by Washington REIT, not under the later Elme Communities name.
• Separate recurring performance from asset-sale effects: verify the $106.0 million sale gain and its impact on six-month net income, EPS and FFO.
• Assess liquidity and cash generation against planned capital spending and dividends, given the cash decline and lower operating cash flow.
• Review lease-up and redevelopment progress, particularly occupancy at 7900 Westpark Drive and the timing and funding of development projects.
• Check debt maturities, mortgage terms, covenant headroom and refinancing exposure; the filing gives no single consolidated debt-maturity schedule beyond specified unsecured-note maturities.