Washington Real Estate Investment Trust (now Elme Communities) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is under the historical name Washington Real Estate Investment Trust. The company owned 48 properties in the greater Washington, D.C. region: 19 office, 16 retail, and 13 multifamily properties.
Financial highlights
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Rental revenue | $82.5 million | $82.8 million | $254.0 million | $243.8 million |
| Net income attributable to controlling interests | $5.9 million | $2.8 million | $19.9 million | $17.3 million |
| Basic and diluted EPS | $0.07 | $0.04 | $0.25 | $0.22 |
| NOI | $53.9 million | $53.2 million | $166.0 million | $157.6 million |
| NAREIT FFO | $36.2 million | $35.8 million | $109.5 million | $105.5 million |
| Cash from operations | Not stated by quarter | Not stated by quarter | $100.9 million | $94.0 million |
Q3 NOI margin was approximately 65.4% of rental revenue, compared with 64.2% a year earlier; nine-month NOI margin was approximately 65.4%, versus 64.6%. Real estate expenses were 34.6% of rental revenue in both 2018 periods reported in the MD&A, compared with 35.8% in Q3 2017 and 35.4% for the first nine months of 2017.
At September 30, total assets were $2.42 billion and total equity was $1.09 billion. Total debt was $1.24 billion: $1.00 billion of notes, $183.0 million drawn on the revolver, and $58.0 million of mortgage principal. Cash and restricted cash totaled $6.2 million, including $4.8 million unrestricted cash. The $700 million revolving facility had $517 million unused and available. The company reported compliance with debt covenants.
Nine-month investing cash flow was positive $8.8 million, reflecting $174.3 million net sale proceeds, offset in part by $106.4 million of acquisitions, $33.4 million of property improvements, and $25.0 million of development spending. Financing cash flow was negative $116.1 million, including $95.1 million of dividends paid. Dividends declared were $0.30 per share quarterly, or $0.90 for the nine months.
Changes versus prior comparable periods
- Q3 rental revenue declined 0.4%, while NOI rose 1.4% and NAREIT FFO rose 1.1%. Same-store rental revenue increased 2.9% and same-store NOI increased 3.4%; same-store occupancy improved to 94.0% from 93.3%.
- Q3 net income attributable to controlling interests rose 108.0%, mainly because the prior-year quarter included a $5.0 million impairment charge. The increase also reflected higher NOI, partly offset by higher depreciation and interest expense.
- For the first nine months, rental revenue increased 4.2%, NOI increased 5.4%, NAREIT FFO increased 3.7%, and net income attributable to controlling interests increased 15.1%. Same-store rental revenue and NOI grew 2.7% each.
- Interest expense rose 2.7% in Q3 and 8.5% for the nine months. The company attributed the increase primarily to higher term-loan and revolver costs and borrowings.
Transactions, outlook, and risks
- Acquired Arlington Tower, a 391,000-square-foot office property, for a $250 million contract price. Sold Braddock Metro Center for $93.0 million and 2445 M Street for $101.6 million; the latter generated a $2.5 million gain. The 2445 M Street sale followed a $1.9 million impairment earlier in 2018.
- Refinanced and expanded its revolving credit facility to $700 million, extending its term to March 2022 with two six-month extension options, and put in place a $250 million term loan maturing in July 2023. Interest-rate swaps fixed rates on $400 million of term debt; the reported swap asset was $17.2 million.
- Management estimated 2018 capital needs of approximately $80–$85 million for operating-property investment and $40–$45 million for development and redevelopment, in addition to dividends and potential acquisitions. No earnings or FFO guidance was provided in the supplied filing text.
- The company expected to adopt the new lease accounting standard on January 1, 2019. Its preliminary estimate was that indirect leasing costs no longer eligible for capitalization could reduce annual earnings by $1.0–$1.5 million; the full impact remained under evaluation.
- Management cited risks including interest-rate and capital-market conditions, tenant and regional economic health, leasing and occupancy, competing supply, real-estate ownership risks, federal spending changes, REIT qualification, and the sustainability of dividends. It stated that risk factors were not materially changed from the 2017 Form 10-K. No legal proceedings were reported.
Key investor verification points
- Verify whether same-store occupancy, leasing spreads, and rental growth remain positive, particularly across office properties.
- Review debt maturities, variable-rate exposure, swap coverage, covenant headroom, and the cost of refinancing as interest rates change.
- Assess dividend coverage against operating cash flow and recurring capital needs; management cautioned that a significant decline in operating cash flow could require a dividend reduction.
- Track development spending and delivery, including The Trove, the Riverside-area multifamily project, and Spring Valley Village redevelopment, and compare costs with expected returns.
- Evaluate the effect of property dispositions, acquisitions, share issuance, and lease-accounting adoption on recurring earnings and per-share FFO.