Elme Communities quarterly report, Q3 FY2016

Business context and reporting period

Washington Real Estate Investment Trust (Washington REIT) filed this unaudited Form 10-Q for the quarter ended September 30, 2016. The filing describes a Washington-metro-area portfolio of office, multifamily and retail properties. The filing registrant is Washington REIT; investors should verify its relationship to the company identified in the request, Elme Communities.

Financial results and key metrics

• Quarterly net income included a $77.6 million gain on sale of real estate. Nine-month gains were $101.7 million; reported earnings therefore substantially reflect asset-sale gains.
• Same-store NOI rose 1.9% in Q3 and 2.1% for the nine-month period. Same-store occupancy was 94.2% at September 30, versus 92.9% a year earlier.
• Nine-month operating cash flow was $84.9 million, compared with $76.2 million. Investing cash use was $39.1 million, versus $155.4 million; financing cash use was $61.0 million, versus $84.3 million provided.
• Cash and cash equivalents were $8.6 million and restricted cash was $10.1 million at September 30. Total debt, net of premiums, discounts and issuance costs, was $1.120 billion; total liabilities were $1.194 billion.
• At September 30, the $600 million revolving facility had $125 million drawn and $475 million unused and available. The filing separately reports $362 million of borrowing capacity as of October 28.
• Dividends declared were $0.30 per share for Q3 and $0.90 per share for the first nine months. The filing says the board reviews dividend levels based on operating results, cash availability and REIT distribution requirements.

Material changes versus prior periods

• Q3 rental revenue increased 2.0%; net income attributable to controlling interests increased by $79.0 million, principally due to the $77.6 million property-sale gain and $1.3 million lower interest expense.
• Q3 NOI increased 0.9%, while FFO increased 10.2%, with lower interest expense, lower acquisition costs and higher NOI contributing to FFO growth.
• Nine-month rental revenue rose 4.0%, NOI rose 5.2%, and FFO rose from $76.9 million to $94.3 million. Nine-month net income growth also reflected substantially higher property-sale gains.
• Portfolio recycling included the $244.8 million acquisition of Riverside Apartments, with 1,222 units and potential adjacent development, and sales totaling $252.1 million, including the Maryland Office Portfolio and Dulles Station Phase II.
• Debt declined from $1.266 billion at year-end 2015 to $1.120 billion at September 30, following mortgage repayments and other financing activity. Shares outstanding increased from 68.2 million to 74.6 million, principally reflecting equity issuances.

Outlook, risks and unusual items

• Management expected to draw on a new $150 million, seven-year unsecured term loan in Q4 2016 or early January 2017 to refinance secured debt. The loan had not been drawn at September 30; swaps were intended to fix its rate at approximately 2.9% beginning March 2017.
• After quarter-end, the company prepaid a $101.9 million mortgage using its revolving facility. Management reported no debt maturities for the remainder of 2016.
• Stated 2016 capital requirements included dividends, repayment or refinancing of secured debt, approximately $60–$65 million for the operating portfolio and approximately $5–$10 million for development and redevelopment. These are identified requirements, not earnings guidance.
• Key disclosed risks include capital availability and cost, interest rates, tenant and Washington-region economic conditions, leasing, government spending, competing supply, property taxes, regulatory matters, weather and maintaining REIT status. Management reported compliance with debt covenants and effective disclosure controls.
• The company recorded a $0.7 million net casualty gain from insurance proceeds related to fire damage. Interest-rate swaps had a $4.9 million net liability; management estimated $1.8 million would be reclassified to interest expense over the following 12 months.

Investor verification priorities

• Confirm the registrant and corporate identity: this filing is for Washington Real Estate Investment Trust, despite the request naming Elme Communities.
• Assess recurring operating performance separately from gains on property sales; compare NOI and FFO with GAAP earnings and review their non-GAAP definitions.
• Verify post-quarter borrowing, the reported $362 million revolver capacity as of October 28, and the status and use of the $150 million term loan.
• Review the effect of asset sales and Riverside Apartments on portfolio composition, future rental income and capital needs.
• Evaluate dividend coverage, equity dilution, refinancing requirements, interest-rate exposure and the $4.9 million swap liability.