Washington Real Estate Investment Trust (Washington REIT) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The filing is by Washington Real Estate Investment Trust, not a company identified in the filing as Elme Communities; verify the issuer and corporate-history link before attributing these results.
Business context
Washington REIT owned 54 properties in the greater Washington, D.C. region: 25 office properties, 16 retail centers and 13 multifamily properties, plus development land. The portfolio included approximately 7.3 million square feet of commercial space and 2,890 multifamily units. The company completed its medical office portfolio sale in January 2014.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Rental revenue | $73.4 million | $65.8 million | $214.3 million | $196.3 million |
| Net operating income (NOI) | $47.5 million | $42.6 million | $136.5 million | $126.8 million |
| Net income attributable to controlling interests | $3.7 million | $5.8 million | $109.3 million | $18.4 million |
| FFO, as defined by NAREIT | $28.0 million | $30.2 million | $74.3 million | $90.7 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $62.9 million | $93.5 million |
- Q3 rental revenue and NOI each increased 11.5% year over year. Same-store occupancy rose to 93.2% from 89.8%; total portfolio occupancy was 90.7%, versus 89.6%.
- Q3 NOI margin was approximately 64.7% of rental revenue, broadly unchanged from the prior-year quarter. Nine-month real estate expenses grew faster than revenue, and the expense ratio increased to 36.3% from 35.4%.
- Nine-month net income included a $106.0 million gain on sale of real estate, principally from the medical office portfolio disposition. Excluding that gain, reported net income and FFO trends were materially weaker: nine-month FFO fell 18.2%.
- At September 30, cash and cash equivalents were $8.6 million, restricted cash was $9.5 million, and total debt was $1.165 billion, compared with $1.141 billion at year-end 2013. Debt comprised $747.1 million of notes, $413.3 million of mortgage debt and $5.0 million drawn on credit lines.
- Credit facilities totaled $500 million; $495 million was unused at quarter-end. The company reported compliance with debt covenants. No debt maturities were due in the remainder of 2014, apart from recurring amortization.
- Nine-month cash flow from operations declined 32.7% to $62.9 million. Investing activities used $36.7 million and financing activities used $148.0 million. Cash fell from $130.3 million at year-end 2013 to $8.6 million.
- Quarterly dividends were $0.30 per share, unchanged year over year; nine-month declared dividends were $0.90 per share. The filing notes that a significant operating-cash-flow decline could require a dividend reduction.
Material changes, outlook and risks
- 2014 acquisitions included Yale West (216 multifamily units), The Army Navy Club Building and 1775 Eye Street, NW, for combined contract prices of $256.5 million. The acquisitions contributed $10.4 million of rental revenue and a $2.8 million net loss in the nine-month period.
- Medical office portfolio sales generated $193.6 million of proceeds in early 2014 and a $106.0 million gain. The company also repaid $100 million of 5.25% notes in January using sale proceeds.
- After quarter-end, Washington REIT bought Spring Valley Retail Center for $40.5 million, funded with credit-line borrowings; it subsequently borrowed an additional $50 million for the purchase and general corporate purposes.
- Management expected to invest a further $20–25 million in operating-portfolio capital needs and $15–20 million in development and redevelopment through year-end 2014. The 7900 Westpark Drive office redevelopment was expected to finish in Q1 2015, with total investment estimated at $35 million.
- The Maxwell multifamily development was expected to complete in Q4 2014. Construction at 1225 First Street remained delayed because of market conditions and oversupply concerns.
- Key stated risks include interest rates and refinancing, capital availability and cost, tenant and regional economic conditions, federal spending, competing supply, lease timing and pricing, and regulatory or environmental requirements. The filing reported no legal proceedings, defaults or new risk factors for the period.
Investor verification priorities
- Confirm the issuer identity and its relationship to Elme Communities, since the filing names Washington Real Estate Investment Trust.
- Separate recurring operating performance from the large property-sale gain; review FFO and same-store NOI alongside GAAP net income.
- Assess the cash decline, planned capital spending, post-quarter credit-line borrowing and capacity to fund the dividend and development program.
- Review occupancy and lease renewals, especially office non-same-store occupancy affected by the 7900 Westpark redevelopment.
- Check debt maturities, interest-rate exposure, covenant headroom and the performance and completion status of development projects.