Elme Communities quarterly report, Q3 FY2015

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Business context and reporting period

Washington Real Estate Investment Trust (Washington REIT) filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The filing identifies the issuer as Washington REIT; verify its relationship to the company named in the request, Elme Communities. The REIT owned 56 properties in the greater Washington, D.C. region: 25 office properties, 17 retail centers and 14 multifamily properties, plus development land.

Financial and operating results

Amounts are in U.S. dollars; financial figures below are in millions except per-share data.

  • Third-quarter revenue: $78.2, up 6.6% year over year. Real estate expenses were $28.1, up 8.5%; reported real estate operating income was $14.9, versus $18.6.
  • Third-quarter earnings: Net income was $0.6; net income attributable to controlling interests was $0.6 ($647,000), or $0.01 per diluted share, versus $3.7 ($3.668 million), or $0.05 per share. The filing attributes the lower result primarily to amortization of lease intangibles from a recently acquired multifamily property.
  • Third-quarter property performance: NOI was $50.1, up 5.5%; NAREIT FFO was $29.9, up 6.8%. Same-store NOI fell 1.0%. Total occupancy was 90.7%, unchanged year over year; multifamily occupancy declined to 92.3% from 94.3%.
  • Nine-month results: Revenue was $227.3, up 6.1%; NOI was $142.8, up 4.6%; NAREIT FFO was $76.9 versus $74.2. Net income attributable to controlling interests was $27.6 versus $109.3, with the prior-year period including a $106.0 gain on the sale of medical-office properties.
  • Cash flow and dividends: Nine-month operating cash flow was $76.2, compared with $62.9. Investing used $155.4, while financing provided $84.3. Dividends declared were $0.30 per share for the quarter and $0.90 for the nine-month period; cash dividends paid totaled $61.5.
  • Debt and liquidity: Total debt was $1,361.8 at September 30, up from $1,215.7 at December 31, 2014. Cash and cash equivalents were $21.0, with restricted cash of $12.5. The $600 million revolving facility had $195.0 outstanding and $389.5 unused and available, after letters of credit.

Material changes versus prior comparable periods

  • Third-quarter revenue growth was driven mainly by acquisitions, partial lease-up of The Maxwell, and higher same-store rents and lease termination fees. Same-store NOI nevertheless decreased as expense growth exceeded same-store revenue growth.
  • Multifamily rental revenue benefited from acquiring The Wellington, but total multifamily occupancy weakened; The Maxwell was 69.5% occupied during its lease-up.
  • Nine-month reported earnings fell sharply because 2014 included substantial property-sale gains. Excluding the effects of gains and depreciation-related FFO adjustments, the filing reports nine-month NAREIT FFO of $76.9 versus $74.2.
  • Depreciation and amortization increased 20.5% in the quarter, largely due to acquisitions and assets placed into service. Interest expense was down 4.0% for the quarter but essentially unchanged for the nine-month period.

Outlook, commentary, risks and unusual items

  • Management estimated 2015 capital needs of $50–55 million for existing operating properties, including $30–35 million for tenant-related costs and leasing commissions, and approximately $15 million for development and redevelopment. Acquisition funding needs were expected to be offset in part by potential dispositions.
  • Management stated that the quarterly dividend was $0.30 per share and that its maintenance depended on operating results, available cash and REIT distribution requirements. A $0.30 dividend payable January 5, 2016 was declared after quarter-end.
  • A new $150 million term loan matures in March 2021. Swaps convert its floating rate to a 2.7% fixed rate beginning October 15, 2015. The swaps had a $2.3 million fair-value liability at quarter-end; the company estimated $1.8 million would be reclassified to interest expense over the next 12 months.
  • The company recorded a $5.9 million impairment on its 1225 First Street development interest before selling its 95% joint-venture interest for $14.5 million. It also recorded a $30.3 million gain on the sale of Country Club Towers.
  • After quarter-end, Munson Hill Towers was sold for $57.1 million; management expected to record an approximately $51 million gain. A sale agreement for Montgomery Village Center, for $27.8 million, was also announced, with closing expected before year-end 2015.
  • Disclosed risks include interest-rate and refinancing exposure, capital availability and cost, tenant and regional economic conditions, leasing and occupancy, property taxes, competition, regulation, and maintaining REIT qualification. The company reported compliance with debt covenants and effective disclosure controls at quarter-end; no legal proceedings or new risk factors were reported in this filing.

Important facts for investors to verify

  1. Confirm the issuer identity and mapping between Washington REIT, named in the filing, and Elme Communities in the request.
  2. Review same-store operating trends, particularly the quarterly 1.0% NOI decline and weaker multifamily occupancy, against acquisition-driven growth.
  3. Assess leverage, maturities, covenant headroom, revolving-credit availability and the effect of variable-rate debt despite the term-loan hedge.
  4. Verify the realized proceeds and gain from the Munson Hill Towers sale and the status and economics of the planned Montgomery Village Center disposition.
  5. Compare operating cash flow and recurring property and leasing expenditures with dividend requirements; NAREIT FFO is a supplemental measure, not cash available for distribution.