Washington Real Estate Investment Trust (WRIT) — 2010 Form 10-K
Period and context: Fiscal year ended December 31, 2010; filed February 25, 2011. The supplied filing is for Washington Real Estate Investment Trust, not a filing under the name Elme Communities. WRIT was a Washington-region-focused equity REIT operating office, medical office, retail, multifamily and industrial/flex properties. At year-end it reported 85 properties and 2,540 residential units.
Financial performance and position
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Rental revenue | $298.0 million | $298.2 million | Down 0.1%; lower same-store occupancy was largely offset by acquisitions and development properties. |
| Net operating income (NOI) | $199.1 million | $196.9 million | Up 1.1%; NOI margin was approximately 66.8% versus 66.0%. |
| Net income attributable to controlling interests | $37.4 million | $40.7 million | Down $3.3 million; included $21.6 million in property-sale gains and a $9.2 million loss on debt extinguishment. |
| Diluted earnings per share | $0.60 | $0.71 | Continuing-operations diluted EPS was $0.21 versus $0.41. |
| Funds from operations (FFO) | $111.6 million | $121.8 million | Down $10.2 million, principally reflecting the debt-extinguishment loss. FFO is a non-GAAP measure. |
| Cash from operating activities | $111.9 million | $102.9 million | Up $9.0 million, primarily from lower interest payments. |
| Cash used in investing activities | $111.2 million | $12.8 million | Higher acquisition spending, partly offset by property-sale proceeds. |
| Cash and cash equivalents | $78.8 million | $11.2 million | Restricted cash was an additional $21.6 million. |
| Total debt | $1.234 billion | $1.200 billion | Includes $753.6 million of notes, $380.2 million of mortgage debt and $100.0 million drawn on credit facilities. |
Real estate expenses were 33.2% of revenue, compared with 34.0% in 2009. Interest expense declined 7.7% to $68.4 million. Year-end total assets were $2.168 billion and shareholders’ equity was $857.1 million. The filing reports an earnings-to-fixed-charges ratio of 1.18x and debt-service coverage of 2.60x. WRIT paid $1.73 per share in dividends, unchanged from 2009; cash dividends totaled $108.9 million.
Material changes and operating trends
- Overall portfolio occupancy fell to 88.3% from 90.3%. Office occupancy was 89.4%, retail 92.1%, multifamily 95.7% and industrial 78.6%; medical office was 88.5%, affected by the still-underleased Lansdowne building.
- Same-store NOI declined 1.6% to $188.2 million, while total NOI rose on contributions from acquisitions and other non-same-store properties. Multifamily NOI increased 8.8%; industrial NOI fell 8.2%, office same-store NOI declined 2.5%, and retail NOI declined 1.4%.
- WRIT acquired two Stafford, Virginia office buildings for $68.0 million and Gateway Overlook, a Maryland retail center, for $88.4 million. It sold eight properties during the year; disclosed sales totaled $73.9 million and generated $21.6 million in gains.
- WRIT issued $250 million of 4.95% notes due 2020 and repurchased $131.7 million of convertible notes and $56.1 million of 5.95% notes. It also issued 5.6 million common shares through its sales-agency program for $168.9 million net proceeds, diluting existing holders.
- Operating cash flow exceeded cash dividends by approximately $3.0 million before considering capital spending. FFO was only modestly above cash dividends, and FFO is not equivalent to cash available for distribution.
Outlook, risks and contingencies
- Management expected slow, steady improvement in regional real estate conditions in 2011, but anticipated continued difficulty leasing vacant commercial space and some rent decreases on new or renewed leases. It did not provide quantified earnings or FFO guidance.
- Management expected approximately $35–45 million of investment in existing operating assets, including $20–25 million for tenant-related capital and leasing commissions; tenant-related capital overall was expected to be about $15.7 million in 2011. It also identified approximately $127.3 million for known property acquisitions and expected $1–5 million of development investment.
- 2011 refinancing needs were material: $105.9 million of mortgage and unsecured note maturities, plus revolving credit facilities totaling $337 million that mature in June and November 2011. WRIT expected to extend or replace facilities and fund maturities through debt, asset sales and/or equity; it cautioned that financing might not be available on favorable terms.
- WRIT was exploring a sale of all or part of its industrial/flex segment, but no transaction was assured. Management said proceeds from a possible sale might not be fully replaced by acquisition income in 2011.
- Subsequent to year-end, WRIT closed on an $80.3 million purchase of an office building at 1140 Connecticut Avenue and contracted to buy another Washington, D.C. office building for $47.0 million.
- Key risks include concentration in the Washington region and exposure to federal spending, vacancies and lease renewals, tenant credit, refinancing and interest-rate risk, covenant compliance, acquisition/development execution, environmental liabilities, uninsured losses and continued REIT qualification. Management reported compliance with debt covenants at December 31, 2010. It stated that ordinary-course litigation and claims were not expected to have a material adverse effect; the filing reported no material legal proceedings.
Important facts for investors to verify
- Confirm the entity and reporting-period mapping: this is WRIT’s 2010 annual report, not a filing identified as Elme Communities.
- Track refinancing or replacement of the 2011 credit facilities and repayment of the stated 2011 debt maturities.
- Assess whether occupancy and leasing improve, particularly in office and industrial/flex, and whether new lease economics offset vacancies and rent pressure.
- Reconcile reported net income and FFO to recurring property performance, excluding property-sale gains and debt-extinguishment costs.
- Verify completion, funding and expected returns of the subsequent acquisitions, and any decision or terms concerning an industrial/flex portfolio sale.