Washington Real Estate Investment Trust (now Elme Communities) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. The filing registrant was Washington Real Estate Investment Trust (WRIT). Unless noted otherwise, dollar amounts below are in millions.
Business context
WRIT owned and operated income-producing properties in the greater Washington, D.C. region. At quarter-end, its portfolio included 69 properties—office, medical office, retail and multifamily—with approximately 8.5 million square feet of commercial space, 2,540 multifamily units and land held for development.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Rental revenue | $76.9 | $75.2 | +2.3% |
| Net operating income (NOI) | $49.8 | $49.7 | +0.3% |
| Income from continuing operations | $4.0 | $4.8 | Lower |
| Net income | $7.3 | $5.2 | +41.6% |
| Net income per diluted share | $0.11 | $0.08 | +$0.03 |
| FFO | $29.7 | $31.2 | -4.8% |
| Cash from operating activities | $36.9 | $35.6 | +$1.3 |
NOI was approximately 64.8% of rental revenue, down from 66.0%. Real estate expenses rose 6.0% to $27.1 million, faster than revenue; interest expense increased 4.3% to $16.5 million. Net income included a $3.2 million gain on the Atrium Building sale, while continuing-operations income declined.
At March 31, cash and cash equivalents were $16.7 million, with restricted cash of $10.8 million. Total debt was $1.229 billion, versus $1.249 billion at year-end 2012; total liabilities were $1.311 billion and total assets were $2.096 billion. Revolving credit facilities had $70 million drawn and $430 million available. WRIT reported compliance with debt covenants. Operating cash flow exceeded dividends paid of $20.0 million during the quarter.
Material changes and operating performance
- Same-store NOI fell 1.5% to $48.9 million, primarily because lower occupancy offset higher rental rates. Total occupancy declined to 88.6% from 89.7%; office occupancy was 85.4% versus 86.4%.
- NOI was mixed by segment: office +2.4% overall, medical office -7.4%, retail +2.7%, and multifamily -1.5% year over year. Management attributed pressure in several segments to vacancies, bad debt and higher property costs.
- WRIT sold the Atrium Building on March 19 for a contract price of $15.75 million, recording a $3.2 million gain. Sale proceeds contributed to investing cash flow.
- Commercial lease renewals were 72.2% of expiring space versus 64.9% a year earlier. New leases covering about 388,000 square feet had average rental rates 10.9% above expiring leases; tenant improvements and leasing costs averaged $26.34 per square foot.
- WRIT repaid $60 million of 5.125% unsecured notes at maturity and prepaid a $30 million West Gude Drive mortgage. It used credit-facility borrowings in part to fund the repayments. No debt maturities remained for the rest of 2013, apart from recurring principal amortization.
Outlook, risks and unusual items
Management expected market conditions to remain challenging through the rest of 2013, citing federal spending austerity, limited private-sector growth, and constrained demand and rental rates for office space. It provided no specific earnings or FFO guidance.
Estimated 2013 capital needs included $55–$65 million for the operating portfolio, including $25–$35 million for tenant-related costs and leasing commissions, and $30–$35 million for development projects. Potential acquisitions and dispositions, including a possible sale of the medical office segment, could affect funding needs.
WRIT delayed construction of the 1225 First Street multifamily project because of market conditions and oversupply concerns, and stopped capitalizing interest there. The 650 North Glebe project was expected to be completed in Q4 2014; estimated total project cost was $49.9 million, with third-party debt financing secured for approximately 70% of cost during the quarter. Interest-rate exposure includes variable-rate credit-facility borrowings; management warned that adverse rate movements could affect earnings if facility balances remain elevated. The filing also identifies tenant health, regional economic conditions, leasing, capital availability, competing supply and regulatory matters as risks.
The quarterly dividend was $0.30 per share, following a reduction from $0.43375 in September 2012. Management stated that future dividend levels depend on operating results, available cash and REIT distribution requirements. The company reported effective disclosure controls and no material change in internal control over financial reporting; it listed no legal proceedings or defaults on senior securities.
Important facts for investors to verify
- Whether same-store occupancy and NOI stabilized after the quarter, especially in office and medical office properties.
- Whether the $3.2 million property-sale gain is distinguished from recurring operating performance, and how FFO and cash flow trends developed.
- Current debt maturities, interest-rate exposure, credit-facility usage and continued covenant compliance.
- Actual spending versus the stated 2013 capital and development ranges, and the status and financing of the two multifamily projects.
- Any subsequent decision on the medical office segment and the sustainability of the $0.30 quarterly dividend.