Business context and reporting period
This is Washington Real Estate Investment Trust’s (WashREIT; NYSE: WRE) Form 10-K for the fiscal year ended December 31, 2019, not a filing under the name Elme Communities. It reports annual results and unaudited quarterly data, including fourth-quarter 2019. WashREIT owned properties in the Washington, D.C. metro area and was shifting its portfolio from retail toward multifamily, with office and multifamily as its reportable segments.
At year-end, the portfolio comprised 21 multifamily properties with 6,658 units, 16 office properties and eight remaining retail centers. Multifamily properties were 96% leased; office properties, 92%. Eight multifamily acquisitions added 2,390 units for a stated total cost of $531.5 million. The company sold eight retail properties during 2019.
Financial performance and position
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Real estate rental revenue from continuing operations | $309.2 million | $291.7 million | Up 6.0% |
| Net operating income (NOI) | $193.6 million | $186.1 million | Up 4.0%; reported NOI margin was approximately 62.6% of continuing rental revenue, calculated |
| Income from continuing operations | $29.1 million | $1.2 million | Continuing operations diluted EPS: $0.36 vs. $0.01 |
| Net income attributable to controlling interests | $383.6 million | $25.6 million | Diluted EPS: $4.75 vs. $0.32; 2019 includes substantial property-sale gains |
| NAREIT FFO | $134.1 million | $146.2 million | Down 8.3% |
| Cash provided by operating activities | $130.9 million | $147.4 million | Down $16.4 million |
| Dividends declared per share | $1.20 | $1.20 | Unchanged |
Net income included $339.0 million of gains from the retail properties reported as discontinued operations. Continuing operations also reported $60.0 million in net gains on property sales, primarily the $61.0 million gain on 1776 G Street, partly offset by a loss on Quantico Corporate Center. The annual earnings increase therefore does not represent a comparable increase in recurring operating performance.
At December 31, 2019, total assets were $2.63 billion, total liabilities $1.22 billion, and shareholders’ equity $1.41 billion. Debt carrying value was approximately $1.10 billion: $996.7 million of notes, $47.1 million of mortgage notes and $56.0 million drawn on the credit facility. Cash and cash equivalents were $12.9 million, plus $1.8 million restricted cash. Debt’s weighted average maturity was 2.5 years, with a reported average interest rate of 3.9%. The $250 million of 4.95% unsecured notes mature in October 2020. The company prepaid its remaining $45.6 million mortgage in January 2020.
The revolving facility commitment was $700 million; year-end borrowings were $56 million. The filing separately reports $644 million unused at year-end and $573 million of availability as of February 13, 2020. Debt covenants were met at year-end. The company had no mortgage notes outstanding after the January 2020 prepayment.
Material changes versus the prior period
- Continuing rental revenue increased 6.0%, supported by the 2019 multifamily acquisitions. Same-store rental revenue grew 0.8%, but same-store NOI declined 0.2%.
- Same-store multifamily rental revenue rose 3.4%; same-store office rental revenue fell 2.0%. Same-store office occupancy declined to 88.5% from 93.6%; total continuing-portfolio occupancy was 92.8%, versus 93.2%.
- NOI rose 4.0%, while NAREIT FFO declined 8.3%, reflecting lower income from discontinued operations and higher interest, general and administrative, and lease-origination expenses.
- Operating cash flow fell 11.2% (calculated), primarily reflecting property sales, partly offset by the multifamily acquisitions. Investing cash flow turned positive as property-sale proceeds exceeded acquisitions and development spending.
- Debt at year-end was lower than 2018, particularly revolving-credit borrowings ($56 million versus $188 million). The company issued 1.86 million common shares through its at-the-market program for net proceeds of $54.9 million.
Outlook, management commentary and risks
The filing does not provide a formal earnings or FFO forecast. For 2020, management expected $85–$90 million of investment in existing operating properties, including $20–$25 million for tenant-related capital and leasing commissions, and $42.5–$47.5 million for development and redevelopment. It expected to fund requirements through operating cash flow, property sales and access to capital, while cautioning that availability and costs could change.
Management highlighted the Washington-area concentration and exposure to government and professional/business services employment, tenant retention and leasing costs, office vacancy and competitive supply, interest rates and refinancing, and real estate operating costs. It also cited development execution, property impairments, climate and energy-efficiency requirements, severe weather, insurance, environmental compliance, cybersecurity, and REIT qualification as risks. The regional multifamily market had 32,000 new units projected for delivery in 2020, which management said could restrain Class A rent growth; the regional office market also faced potential pressure on occupancy and effective rents from new supply.
Unusual items include an $8.4 million impairment charge on Quantico Corporate Center, $1.7 million of indirect leasing costs expensed following adoption of new lease accounting standards, and the large gains from retail and office dispositions. The filing reports no material off-balance-sheet arrangements and no material adverse effect expected from current legal matters. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer identity and ticker: the supplied filing is for Washington Real Estate Investment Trust (WRE), although the request metadata names Elme Communities.
- Assess recurring earnings separately from the $399.0 million of aggregate 2019 property-sale gains and compare FFO, same-store NOI and operating cash flow.
- Review the October 2020 $250 million note maturity, refinancing or repayment arrangements, and the difference between reported year-end unused facility capacity and February 2020 availability.
- Track office leasing and occupancy, especially given lower same-store office occupancy and the 2020 regional supply outlook; examine lease expirations and tenant-improvement costs.
- Monitor execution, spending and expected returns for The Trove and the Riverside-area development, as well as the planned 2020 capital program and dividend funding.
- Verify completion of the planned John Marshall II sale, expected in the first quarter of 2020, and the results of the January 2020 mortgage prepayment.