Washington Real Estate Investment Trust (WashREIT) — Q3 2019 Form 10-Q
Period: Three and nine months ended September 30, 2019; unaudited. The filing is for Washington Real Estate Investment Trust, not under the name Elme Communities. Amounts below are in millions except per-share data, occupancy and where noted.
Business context
WashREIT owned 46 properties in the greater Washington metro area: 17 office properties, 21 multifamily properties and 8 remaining retail properties, plus development land. It continued a strategic shift from retail to multifamily, acquiring 2,390 apartment units and selling eight retail properties during the period. Retail dispositions were reported as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Real estate rental revenue | $80.3 | $71.0 | $228.5 | $220.0 |
| Net operating income (NOI) | $49.6 | $45.0 | $143.5 | $140.1 |
| Net income attributable to controlling interests | $332.8 | $5.9 | $329.4 | $19.9 |
| Continuing-operations income (loss) | $(8.4) | $(0.5) | $(25.1) | $1.5 |
| NAREIT FFO | $31.1 | $36.2 | $102.1 | $109.5 |
| Interest expense | $14.2 | $12.3 | $41.9 | $38.2 |
- Q3 net income included a $339.0 million gain on retail property sales; it is not representative of recurring operating earnings. Q3 diluted earnings per share were $4.14, while continuing operations recorded a loss of $0.10 per share.
- Q3 NOI rose 10.1%, mainly reflecting the multifamily acquisitions; same-store NOI fell 1.6%. For the nine-month period, NOI increased 2.5%, while same-store NOI was nearly flat, up 0.1%.
- Same-store ending occupancy was 92.7% overall versus 94.7% a year earlier, principally reflecting office occupancy weakness. Multifamily same-store occupancy was 95.2%; office was 90.6%.
- Real estate expenses were 38.2% of rental revenue in Q3 versus 36.6%; for the nine months, 37.2% versus 36.3%.
- Nine-month operating cash flow was $91.3 million, down 9.5%. Investing activities used $3.8 million and financing activities used $80.6 million. Cash dividends paid were $96.4 million; period-end cash and cash equivalents were $12.9 million, plus $1.6 million restricted cash.
- At September 30, debt carrying value totaled approximately $1.255 billion: $996.5 million notes payable, $47.3 million mortgage debt and $211.0 million drawn on the revolving facility. The $700 million facility had $489 million unused capacity at quarter-end. Weighted-average debt maturity was 2.9 years; the filing reported covenant compliance.
Material changes and unusual items
- Acquired the Assembly multifamily portfolio (2,113 units) for a contract price of $461.2 million and Cascade at Landmark (277 units) for $69.8 million. Total acquisition costs recorded were $531.5 million.
- Sold eight retail properties for aggregate contract proceeds of $566.3 million and recorded a $339.0 million gain. The sales proceeds were used in part to repay the $450 million short-term term loan used to fund acquisitions. A separate office property sale, Quantico Corporate Center, resulted in a $1.0 million loss; an $8.4 million impairment was recorded earlier in 2019.
- Interest expense increased 15.0% in Q3 and 9.9% year to date. Depreciation and amortization increased 33.6% in Q3 and 17.2% year to date, largely due to acquisitions.
- Adoption of the new lease accounting standard on January 1, 2019 reduced opening retained earnings by $0.9 million. The company also recorded $1.3 million of lease origination expenses for the nine-month period under the revised capitalization rules.
Outlook, risks and contingencies
- The filing provides no earnings or FFO guidance. It estimated full-year 2019 capital requirements of $80–$85 million for the existing portfolio, including $20–$25 million for tenant-related costs and leasing commissions, and $45–$50 million for development and redevelopment, in addition to dividends and potential acquisitions.
- On October 24, 2019, WashREIT extended the World Bank lease at 1776 G Street through 2025 and granted the tenant a one-time purchase right scheduled to expire before year-end 2019.
- Key stated risks include Washington-area economic conditions, tenant health and occupancy, interest rates and refinancing, access to capital, property dispositions, operating costs, competition, and REIT qualification. The company warned that cash flow may be insufficient to repay maturing debt if refinancing or other capital transactions are unavailable. No material off-balance-sheet arrangements or legal proceedings were reported; no material risk-factor changes were disclosed.
Important facts for investors to verify
- Whether recurring NOI and FFO trends offset weaker same-store office occupancy and the loss of income from sold retail assets.
- The effect of retail-sale proceeds and acquisition financing on leverage, refinancing needs and available revolver capacity; confirm subsequent debt maturities and facility availability.
- Execution, lease-up and returns from the acquired multifamily portfolio and development projects, including The Trove and Riverside-area development.
- Whether the World Bank exercises its purchase right and the resulting implications for office revenue and asset strategy.
- Cash available for dividends relative to operating cash flow, capital requirements and REIT distribution obligations.