Washington Real Estate Investment Trust (WRIT) — Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The filing is for Washington Real Estate Investment Trust, a diversified real estate owner operating in the greater Washington, D.C. region; the supplied filing does not identify the issuer as Elme Communities.
Business context and period
WRIT reported 88 properties, approximately 10.9 million square feet of commercial space and 2,540 multifamily units. Its portfolio spans office, medical office, retail, multifamily and industrial/flex properties. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Rental revenue | $75.1 | $75.6 | $151.6 | $152.2 |
| Net operating income (NOI) | $51.0 | $50.5 | $100.0 | $100.2 |
| Net income attributable to controlling interests | $15.0 | $13.1 | $20.2 | $23.9 |
| Continuing-operations EPS | $0.11 | $0.10 | $0.19 | $0.29 |
| Total EPS | $0.24 | $0.23 | $0.33 | $0.44 |
| FFO | $30.7 | $29.9 | $59.5 | $64.1 |
| Operating cash flow | — | $61.9 | $62.4 |
Q2 interest expense declined 11.9% to $17.0 million; six-month expense fell 12.6% to $34.1 million. Real estate expenses were 32.1% of revenue in Q2 and 34.0% for the six-month period, compared with 33.2% and 34.2%, respectively, in 2009. NOI and FFO are non-GAAP measures as defined by the filing.
At June 30, total assets were $2.07 billion and total debt was $1.20 billion, comprising $689.0 million of unsecured notes, $403.6 million of mortgages and $107.0 million drawn on credit facilities. Cash and cash equivalents were $13.3 million, with an additional $23.1 million restricted. The two revolving facilities had $228.2 million of stated unused availability, before considering any other borrowing constraints. Equity was $792.3 million. Dividends were $0.4325 per share for the quarter and $0.8650 for the six months.
Material changes versus prior periods
- Q2 rental revenue decreased 0.6%; six-month revenue decreased 0.4%. Lower occupancy in core properties weighed on revenue. Total economic occupancy fell to 90.8% in Q2 from 93.2%; industrial occupancy declined to 82.3% from 90.6%.
- Q2 NOI increased 0.9%, while six-month NOI was nearly flat, down 0.2%. Multifamily gains, including lease-up of development properties, partly offset weakness in industrial and other segments.
- Six-month controlling-interest net income and EPS declined, in part because 2009 included a $7.1 million debt-extinguishment gain, versus a $42,000 loss in 2010. Q2 net income increased, aided by lower interest expense and a larger real estate sale gain.
- Q2 included a $7.9 million gain on the sale of the Parklawn Portfolio. WRIT acquired two fully leased Quantico office buildings for $68.0 million and issued 2.3 million shares during the six months for $67.1 million net proceeds.
- Operating cash flow was broadly stable. Investing used $56.0 million, chiefly for the acquisition and capital improvements; financing used $3.8 million. Cash increased by $2.1 million during the period.
Outlook, risks and unusual items
- Management expected 2010 capital needs to include $35–45 million for existing operating assets, about $5 million for first-generation tenant costs, about $3 million for development, and $50–150 million for acquisitions. It expected sufficient operating cash flow and capital access, but cautioned that these expectations were not assured.
- Management cited a slow regional recovery and expected meaningful economic growth to emerge in 2011. It planned to pursue acquisitions and portfolio sales selectively and noted that additional acquisitions were not expected to materially improve 2010 operating performance.
- WRIT said remaining debt maturities were $2.1 million for the balance of 2010 and $403.4 million in 2011, expected to be funded through a combination of refinancing, property sales and equity issuance. A $21.7 million mortgage was prepaid after quarter-end. Credit Facility No. 2, with $100 million drawn, matured in November 2010 and was extendable at WRIT’s option; substantial 2011 maturities also include convertible notes.
- Key risks include refinancing and capital-market access, interest-rate changes, tenant credit and occupancy, Washington-region conditions, federal spending, competing supply, and compliance and terrorism-related exposures. Management reported compliance with debt covenants at June 30. Moody’s rating outlook was negative; S&P’s was stable.
- The company anticipated treating the gain on the Parklawn sale as a distribution to shareholders. No property impairments were recorded in the reported periods. The filing reported no legal proceedings.
Important facts for investors to verify
- Confirm the correct issuer: this supplied 2010 filing is for Washington Real Estate Investment Trust, not an entity named Elme Communities.
- Track industrial and commercial occupancy, lease renewals, and tenant demand; industrial occupancy and renewal rates weakened materially.
- Review the 2011 refinancing plan, convertible-note put/redemption terms, credit-facility extensions and available liquidity.
- Assess the extent to which earnings and FFO depend on property-sale gains, share issuance, and lower interest expense; compare with recurring property operations.
- Verify the intended tax and distribution treatment of the Parklawn gain and the sustainability of the dividend relative to operating cash generation.