Washington Real Estate Investment Trust (now Elme Communities) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing was submitted under the name Washington Real Estate Investment Trust (ticker WRE). Unless otherwise noted, financial amounts below are in millions of dollars.
Business context and performance
The REIT owned 48 properties in the greater Washington, D.C. region: 19 office properties, 16 retail centers, 13 multifamily properties, and development land. Its portfolio included approximately 6.1 million square feet of commercial space and 4,268 multifamily units.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Rental revenue | $83.2 | $84.9 |
| Real estate expenses | $29.2 | $29.9 |
| Net operating income (NOI) | $54.0 | $55.0 |
| Operating income | $8.2 | $17.3 |
| Net income (loss) | $(4.4) | $3.3 |
| NAREIT FFO | $33.5 | $35.2 |
| Operating cash flow | $27.6 | $36.6 |
NOI declined 1.8%; NAREIT FFO declined 4.7%. Net margin was approximately (5.3)% compared with 3.9% a year earlier, chiefly reflecting impairment and higher corporate costs. NAREIT FFO is a non-GAAP measure and is not cash available for distributions.
Balance sheet, debt and liquidity
- At March 31, total assets were $2,408.5 million, total liabilities $1,370.3 million, and total equity $1,038.2 million.
- Debt carrying value totaled approximately $1,282.6 million: $995.8 million notes payable, $58.8 million mortgage debt, and $228.0 million drawn on the revolving credit facility. The reported weighted average interest rate was 3.9%; weighted average debt maturity was 3.4 years.
- The $700 million revolving facility had $472 million unused at March 31. The filing separately reports $452 million of borrowing capacity as of April 25, 2019.
- Cash and cash equivalents were $12.0 million; including restricted cash, the balance was $13.4 million. The company reported no 2019 debt maturities and said it was in compliance with debt covenants.
- Dividends declared were $0.30 per common share, or $24.1 million. Financing cash flows included $48.2 million of dividends paid, reflecting payment timing.
Changes and management commentary
- Same-store rental revenue rose 3.0% and same-store NOI rose 2.9%, but total NOI fell as 2018 property sales reduced contribution by $2.9 million. Arlington Tower, acquired in 2018, added $0.4 million of NOI.
- Same-store ending occupancy fell to 92.8% from 93.2%, primarily because of lower office occupancy. Office same-store occupancy was 90.4%, down 1.9 percentage points; multifamily was 95.6% and retail 91.9%.
- General and administrative expense increased $1.6 million, primarily from higher share-based compensation and restructuring-related severance. Depreciation and amortization decreased $0.4 million.
- Operating cash flow decreased 24.7%, primarily due to the 2018 sale of 2445 M Street. Investing cash outflow was lower than a year earlier, when the company acquired Arlington Tower.
- The company estimated 2019 capital needs of $80–$85 million for its operating portfolio, including tenant-related costs, and $62.5–$67.5 million for development and redevelopment, in addition to dividends and potential acquisitions.
Outlook, unusual items and risks
- A $8.4 million impairment charge reduced the carrying value of Quantico Corporate Center after the company entered sale discussions. On April 22, 2019, it agreed to sell the property for $33.0 million, with closing anticipated in Q2; completion was not assured.
- On April 2, 2019, the company agreed to acquire seven multifamily properties with 2,113 units for approximately $461 million, potentially in multiple Q2 closings. It planned to fund the purchase through selected office or retail dispositions and had a $450 million unsecured bridge-facility commitment; the commitment had not been funded as of April 29.
- The company provided no specific earnings or operating guidance in the supplied filing text. It cautioned that acquisition and disposition execution, Washington-region economic conditions, office occupancy, tenant health, interest rates, financing availability, and federal spending changes could affect results.
- Adoption of the new lease accounting standard resulted in a $0.9 million reduction to opening retained earnings. The filing also reported $0.4 million of indirect leasing costs expensed under the new rules.
- Interest-rate swaps had $400 million aggregate notional value. Their fair-value movements produced a $4.2 million other comprehensive loss in Q1; management expected $2.7 million to be reclassified as a reduction of interest expense over the following 12 months.
Important facts for investors to verify
- Whether the Quantico sale closed at the stated $33 million price and whether proceeds or any additional gain or loss differed from the impairment estimate.
- Whether the seven-property multifamily acquisition closed, its final funding mix, and whether planned asset dispositions occurred on expected terms.
- Subsequent office leasing and occupancy trends, given lower office occupancy and the decline in total portfolio occupancy.
- Cash available for dividends after tenant, development, and acquisition spending; operating cash flow was below the prior-year quarter.
- Current revolver availability and debt covenant headroom, including the difference between $472 million reported at March 31 and $452 million reported at April 25.