Business context and reporting period
Washington Real Estate Investment Trust (WRIT; identified in the request metadata as Elme Communities) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. WRIT owned 69 properties in the greater Washington, D.C. region: office, medical office, retail and multifamily assets, plus development land. Comparative results are for the three and six months ended June 30, 2012.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Rental revenue | $78.3 | $75.6 | $155.2 | $150.8 |
| Net operating income (NOI) | $50.8 | $50.6 | $100.7 | $100.2 |
| Net income | $5.3 | $6.0 | $12.6 | $11.2 |
| Net income per diluted share | $0.08 | $0.09 | $0.19 | $0.16 |
| Funds from operations (FFO) | $30.8 | $31.6 | $60.5 | $62.8 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $63.0 | $67.1 |
Q2 NOI margin was approximately 65.0% of rental revenue, versus 66.9% a year earlier, reflecting expense growth outpacing revenue. For the first half, real estate expenses rose 7.8% against revenue growth of 2.9%; interest expense increased 4.4% to $32.7 million.
Material changes versus prior comparable periods
- Q2 revenue increased 3.5%, but net income declined 12.4% and FFO declined 2.4%. Q2 NOI edged up 0.6%; same-store NOI fell 1.2%, partly offset by the 2012 Fairgate at Ballston acquisition.
- First-half net income increased 12.6%, largely reflecting a $3.2 million gain on the March sale of the Atrium Building. FFO declined 3.6%; first-half NOI increased 0.5%, while same-store NOI declined 1.4%.
- Portfolio occupancy was 89.1%, down from 89.5% a year earlier. Medical office occupancy was 84.8% versus 86.1%, and multifamily occupancy was 93.1% versus 94.8%.
- First-half cash from operations decreased 6.1%. Cash and cash equivalents fell to $5.9 million from $19.3 million at year-end 2012.
- Total debt was $1.234 billion, down from $1.249 billion at year-end. Debt included $846.5 million of unsecured notes, $312.2 million of mortgage debt and $75.0 million drawn on credit facilities.
Outlook, management commentary, risks and unusual items
- Management was pursuing a potential sale of all or part of the medical office segment during 2013, but noted that acceptable offers, board approval, closing conditions and timely reinvestment were not assured.
- Expected 2013 capital requirements included $55–$65 million for existing properties, including $25–$35 million for tenant-related costs and leasing commissions, and $30–$35 million for development. No debt maturities were expected for the remainder of 2013, apart from recurring principal amortization.
- At June 30, $75 million was drawn on $500 million of revolving credit capacity, leaving $425 million available. WRIT reported compliance with its debt covenants. It said it might rely more on revolving credit in the near term and warned that interest-rate increases could adversely affect earnings if borrowings remain elevated.
- Construction at the 1225 First Street multifamily development was delayed because of market conditions and oversupply concerns; WRIT stopped capitalizing interest and said it would reassess the project. The 650 North Glebe project was expected to be completed in Q4 2014; its $33 million construction loan had $0.4 million outstanding at quarter-end.
- The CEO announced plans to retire at year-end 2013. A separation agreement provides $0.5 million in consulting fees for 2014–2015, to be expensed in Q4 2013.
- Key stated risks include capital availability and cost, interest rates, tenant and regional economic health, leasing, competing supply, and changes in federal government spending. The filing reported no legal proceedings and no defaults; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether a medical office disposition proceeds, its sale price and terms, and how proceeds would be reinvested.
- Occupancy and same-store NOI trends, especially in medical office and multifamily, and whether rent growth can offset higher operating costs and taxes.
- Liquidity after dividends, property investment and development spending; availability under the credit facilities and compliance with debt covenants.
- Debt maturity and refinancing exposure, including the $100 million of 5.25% notes due in 2014 and sensitivity to variable-rate borrowing.
- Development schedules, budgets and market assumptions for North Glebe and the delayed 1225 First Street project.
- The sustainability of the $0.30 quarterly dividend in light of operating cash flow, recurring capital needs and REIT distribution requirements.