Elme Communities quarterly report, Q3 FY2020

Business context and reporting period

Washington Real Estate Investment Trust (WashREIT; now known as Elme Communities) filed this unaudited Form 10-Q for the quarter ended September 30, 2020. Its portfolio was concentrated in the Washington, D.C. metro region: 45 properties comprising 15 office properties, 8 retail centers and 22 multifamily properties, plus development land. The filing reports office and multifamily as its two reportable segments.

Financial and operating highlights

• Q3 diluted loss per share was $0.01, versus income of $4.14 per share in Q3 2019; the prior-year result included a $339.0 million gain on sale of discontinued retail properties. Nine-month diluted loss per share was $0.06, compared with income of $4.10.
• Q3 NOI fell 10.1% and FFO fell 5.2% year over year. Same-store Q3 NOI declined 4.9%; same-store rental revenue fell 4.2%. Company-reported real estate expense was 39.2% of revenue in Q3, up from 38.2%.
• Nine-month cash from operations decreased 7.7%. Investing used $5.8 million and financing used $88.8 million. Cash, cash equivalents and restricted cash totaled $4.4 million at September 30.
• At September 30, total assets were $2.53 billion and total equity was $1.31 billion. Notes payable, net, were $897.4 million; revolver borrowings were $186.0 million. No mortgage debt remained after the Yale West mortgage payoff.
• The $700 million revolving facility had $514 million available at September 30. At October 28, revolver borrowings were $250 million, leaving $450 million available. Reported cash dividends declared were $0.30 per share for Q3 and $0.90 for the nine-month period.

Material changes versus the prior comparable period

• Revenue and NOI were lower, reflecting COVID-19 disruption and property sales, including 1776 G Street in 2019 and John Marshall II in 2020. Same-store occupancy was 90.3% at September 30, down from 91.9% a year earlier; total occupancy was 89.5%, compared with 93.0%.
• Interest expense declined to $8.7 million from $14.2 million in Q3 and to $28.3 million from $41.9 million for nine months, largely following debt repayments and lower borrowing rates.
• The nine-month GAAP comparison is dominated by 2019 retail disposition gains: 2020 recorded a $6.9 million loss on the John Marshall II sale and no comparable discontinued-operation sale gain.
• On September 29, WashREIT agreed to issue $350 million of 3.44% senior unsecured 10-year Green Bonds. Funding was expected by December 29, 2020, subject to customary conditions; it had not occurred by quarter-end. Management expected to use proceeds to repay $300 million of term loans maturing in 2021 and 2022, with the balance directed to revolver or term-loan repayment.

Outlook, risks and unusual items

• Management said COVID-19 had materially affected operations and could continue to affect rent collections, credit losses, occupancy, leasing, cash flows and access to financing; the future financial impact could not be reasonably estimated.
• As of October 20, the company reported collecting 97% of Q3 office cash rent, 88% of retail rent and 99% of multifamily rent, excluding contractual deferrals. Net deferred rent was $1.4 million for office, $1.0 million for retail and $0.1 million for multifamily tenants.
• Office leasing activity and occupancy were pressured; Q3 new gross office leasing square footage declined 46% year over year. Multifamily rent increases were expected to be constrained while economic disruption continued.
• Management estimated full-year 2020 capital needs at $55–$60 million for existing operating assets and $30–$35 million for development and redevelopment, after reducing planned capital spending by about $40 million. The Riverside development was no longer expected to break ground in 2020.
• Management stated it believed liquidity was adequate for near-term needs and expected no remaining 2020 debt maturities. It warned that worsening conditions could affect covenant compliance and financing access. The company was in compliance with debt covenants at September 30 and expected to remain compliant through year-end, but gave no assurance.
• The terminated forward interest-rate swaps had a $20.4 million liability, paid October 2, 2020, to be amortized as interest expense over the Green Bonds’ 10-year term. Interest-rate hedge fair values were a net liability of $12.4 million at quarter-end.
• No legal proceedings were reported. Management said disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.

Important facts for investors to verify

• Whether and when the $350 million Green Bonds closed and funded, and whether the planned debt repayments and maturity extension occurred.
• Subsequent rent collection, deferred-rent repayment, tenant credit losses, occupancy and leasing trends, particularly in office and retail.
• Liquidity and covenant headroom after the October revolver increase, and the company’s ability to refinance upcoming maturities.
• Whether the reduced capital program, development timelines and stated capital requirements changed after quarter-end.
• Cash-flow coverage of dividends: nine-month operating cash flow was $84.2 million versus $74.3 million of dividends paid; FFO is a non-GAAP measure and is not cash available for distributions.