Washington Real Estate Investment Trust (now Elme Communities) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing is under the former name Washington Real Estate Investment Trust and describes a portfolio focused on the greater Washington, D.C. region. Financial amounts below are in U.S. dollars.
Business context and reporting period
At quarter-end, the company reported 51 properties: 21 office, 16 retail and 14 multifamily, totaling approximately 6.5 million square feet of commercial space and 4,480 multifamily units, plus land held for development. Its stated strategy included recycling legacy assets and investing in higher-quality properties.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Rental revenue | $79.4 million | $74.2 million | $156.5 million | $149.1 million |
| Net income (loss) | $31.8 million | $(2.9) million | $34.2 million | $26.5 million |
| Net income (loss) attributable to controlling interests | $31.8 million | $(2.5) million | $34.2 million | $27.0 million |
| Basic and diluted EPS | $0.44 | $(0.04) | $0.49 | $0.39 |
| NOI | $51.2 million | $47.0 million | $99.6 million | $92.6 million |
| NAREIT FFO | $32.9 million | $22.6 million | $61.3 million | $47.0 million |
| Cash from operating activities | — | $60.5 million | $54.3 million |
- Quarterly revenue rose 7.0% and NOI rose 9.0%; six-month revenue rose 5.0% and NOI rose 7.5%. Same-store NOI increased 3.9% in Q2 and 2.0% for the first half. Same-store physical occupancy was 92.7%, down from 93.3% a year earlier.
- Net income included $24.1 million of property-sale gains in the first half, versus $31.7 million in the comparable 2015 period. Q2 net income also benefited from the absence of a $5.9 million impairment recorded in Q2 2015. FFO excludes gains on sale and depreciation and is a non-GAAP measure, not cash available for distributions.
- Real estate expenses were 35.5% of revenue in Q2 versus 36.7% a year earlier, and 36.4% for the first half versus 37.9%. Interest expense fell 6.0% in Q2 and 6.2% for the first half.
- At June 30, total debt was $1.265 billion, comprising $743.8 million notes payable, $252.0 million mortgage notes and $269.0 million revolver borrowings. Cash and cash equivalents were $22.4 million; restricted cash was $11.1 million. The $600 million revolving facility had $331 million unused and available. Total assets were $2.306 billion and total equity was $968.1 million.
- Operating cash flow increased 11.3% to $60.5 million for the first half. Investing activities used $139.4 million, principally reflecting the Riverside Apartments acquisition; financing activities provided $77.5 million. Dividends paid were $63.3 million in the first half; declared dividends were $0.30 per share quarterly.
Material changes versus the prior comparable period
- In May, the company acquired Riverside Apartments in Alexandria, Virginia, for a contract price of $244.8 million. The property has 1,222 units and adjacent land with potential for approximately 550 additional units. It contributed $2.5 million of rental revenue and $0.6 million of net income from acquisition through June 30.
- The company sold Dulles Station, Phase II, for $12.1 million and completed the first stage of a Maryland office portfolio sale for $111.5 million, recognizing a $23.6 million gain on that transaction. The remaining two properties, with a stated contract price of $128.5 million, were classified as held for sale and expected to close in September 2016.
- In May, the company issued approximately 5.3 million common shares at $28.20 per share, receiving net proceeds of about $143.4 million. Shares outstanding were 73.651 million at June 30, compared with 68.191 million at December 31, 2015.
- Mortgage debt fell by $166.0 million during the first half following repayments and the purchase of The Maxwell construction loan; revolver borrowings increased from $105.0 million to $269.0 million. Total debt was approximately unchanged from year-end.
Outlook, management commentary, risks and unusual items
- No formal earnings or FFO guidance was provided. Management identified 2016 capital needs including dividends, approximately $60–65 million for the operating portfolio, $10–15 million for development and redevelopment, and debt refinancing or repayment. It also cited funding for potential acquisitions, offset by potential disposition proceeds.
- After quarter-end, the company entered into a seven-year, $150 million unsecured term loan, maturing July 21, 2023, with a deferred draw period of up to six months. Management expected to draw in Q4 2016 or early 2017 to refinance secured debt. A related hedge is intended to fix the rate at 2.86% beginning March 31, 2017. The loan had not been drawn as of the filing.
- Management highlighted exposure to interest rates, capital availability and cost, tenant financial health, leasing conditions, Washington-area economic conditions, federal spending, competing properties, regulation, and weather or natural disasters. It warned that reduced operating cash flow could require a dividend reduction. The company reported compliance with debt covenants and no scheduled debt maturities in the remainder of 2016, while noting approximately $101.9 million of secured debt could be prepaid without penalty beginning in October.
- Interest-rate swaps fixing $150 million of existing term-loan exposure had a $5.6 million net liability at June 30; the company estimated $1.7 million would be reclassified as increased interest expense over the next twelve months. A fire-related insurance recovery produced a $0.7 million net casualty gain. A $0.7 million tax benefit arose from reducing a deferred-tax-asset valuation allowance.
- The filing reported no legal proceedings, defaults on senior securities, or material off-balance-sheet arrangements. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the remaining $128.5 million Maryland office portfolio sale closed as expected in September 2016, and the final proceeds and gains.
- Riverside Apartments’ operating performance, integration and potential development economics, including the 1031 exchange completion.
- Use and cost of the subsequent $150 million term loan, refinancing of secured debt, and the company’s future maturity schedule and covenant headroom.
- Same-store occupancy and leasing trends—particularly office and retail—and whether rental-rate increases offset occupancy declines and leasing incentives.
- Dividend coverage using recurring cash flows and capital requirements; reported FFO is not equivalent to cash available for dividends.