Business context and reporting period
Washington Real Estate Investment Trust (WRIT), the registrant named in this 10-Q, reported unaudited results for the quarter and nine months ended September 30, 2013. It operated office, retail, multifamily and medical-office properties in the greater Washington, D.C. region. The filing does not identify the registrant as Elme Communities.
At quarter-end, WRIT reported 69 properties, approximately 8.5 million square feet of commercial space and 2,540 multifamily units. The medical-office segment was classified as discontinued operations after agreements to sell it, together with two office buildings.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Rental revenue | $65.8m | $64.5m | $196.3m | $190.1m |
| Net operating income (NOI) | $42.6m | $41.9m | $126.8m | $125.3m |
| Net income | $5.8m | $9.6m | $18.4m | $20.8m |
| FFO, as defined by NAREIT | $30.2m | $32.1m | $90.7m | $94.8m |
| Operating cash flow | Not separately stated | Not separately stated | $93.5m | $92.8m |
- Q3 revenue rose 2.1% and NOI 1.5%; nine-month revenue rose 3.2% and NOI 1.2%. Management attributed revenue growth mainly to higher rents, partly offset by lower occupancy. Nine-month same-store NOI was essentially flat, down 0.1%.
- Net income fell 38.9% in Q3 and 11.1% for the nine-month period. Prior-year results included a $3.7m property-sale gain in Q3; the nine-month 2013 period included a $3.2m gain. Continuing-operations income also declined, while interest expense increased.
- Q3 and nine-month diluted EPS were $0.09 and $0.27, respectively, versus $0.14 and $0.31. Dividends declared were $0.30 per share in Q3 and $0.90 for nine months; the prior-year nine-month amount was $1.1675 following a dividend-rate reduction in September 2012.
- At September 30, cash was $7.9m; total assets were $2.09bn and total equity $758.2m. Total debt was $1.246bn, compared with $1.249bn at year-end 2012. Debt comprised $314.3m of mortgages, $85.0m of credit-facility borrowings and $846.6m of notes payable.
- Revolving facilities totaled $500m, with $85m drawn and $415m unused at quarter-end. WRIT reported compliance with debt covenants. The filing reports no debt maturities for the remainder of 2013; $100m of 5.25% notes were due January 15, 2014.
- For the nine months, investing activities used $40.5m and financing activities used $64.2m; cash declined by $11.2m to $7.9m. Capital improvements and development spending were significant uses of funds.
Material changes, outlook and risks
- In September, WRIT agreed to sell its entire medical-office segment, land at 4661 Kenmore Avenue and two office buildings for an aggregate $500.8m. The four transactions were expected to close in stages from November 2013 through January 2014, subject to closing conditions. Management planned to use proceeds for related mortgage repayments, credit-facility balances, the January 2014 notes maturity, reinvestment and general corporate purposes.
- Management cautioned that delayed or failed closings, or inability to reinvest sale proceeds promptly, could reduce earnings, weaken debt-service coverage and affect the ability to maintain dividends. Even with reinvestment, management expected some near-term earnings decline from transaction timing and acquisition costs.
- For 2013, expected needs included approximately $65m for existing operating assets, including $30m–$35m for tenant-related costs and leasing commissions, and $20m–$25m for development projects, in addition to dividends and potential acquisitions.
- Occupancy across continuing operations was 89.6%, down from 90.0% a year earlier. Retail occupancy declined to 91.4% from 92.8%; multifamily to 94.1% from 94.8%; office increased slightly to 86.4% from 86.3%.
- Construction continued at 650 North Glebe Road, with estimated project cost of $49.9m and expected completion in Q4 2014. WRIT had $3.0m drawn on the project’s $33m construction loan. Construction at 1225 First Street was delayed because of market conditions and oversupply concerns; interest capitalization stopped.
- After quarter-end, WRIT acquired The Paramount, a 135-unit Arlington residential building, for $48.2m, funded by a $50m credit-line borrowing. CEO Paul T. McDermott took office October 1, following the September 30 resignation of prior CEO George F. “Skip” McKenzie. A $0.5m total of consulting fees for the former CEO was to be expensed in Q4.
- Principal risks cited include interest-rate and capital-market conditions, tenant and regional economic health, federal spending, competing supply, and the timing and pricing of leases and portfolio-sale closings. The filing reported effective disclosure controls and no material change in internal control over financial reporting; no legal proceedings or defaults were reported.
Investor verification priorities
- Confirm whether and when all four portfolio-sale transactions closed, the final proceeds and any closing adjustments.
- Review deployment of sale proceeds, debt repayments and refinancing of the January 2014 notes, including subsequent credit-facility balances.
- Track occupancy, same-store NOI, operating-cost growth and leasing costs, particularly in retail and multifamily.
- Assess whether cash generation and reinvestment support the dividend after disposal of the medical-office portfolio.
- Monitor development costs, completion timing and market conditions for 650 North Glebe and the delayed 1225 First Street project.