Business context and reporting period
The filing is Washington Real Estate Investment Trust’s Form 10-K for the fiscal year ended December 31, 2012; it is an annual report, not a standalone 2012 fourth-quarter filing. The company operated as a Washington, D.C.-area equity REIT with office, medical office, retail and multifamily properties. As of year-end, it reported 70 properties, approximately 8.6 million square feet of commercial space and 2,540 residential units.
The filing identifies the registrant as Washington Real Estate Investment Trust (WRIT), not Elme Communities. Figures below describe WRIT’s 2012 filing and should not be assumed to represent a later company or period.
Financial and operating highlights
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Real estate rental revenue | $305.0 million | $284.2 million |
| Net operating income (NOI) | $201.7 million | $188.8 million |
| Income from continuing operations | $17.1 million | Loss of $2.9 million |
| Net income attributable to controlling interests | $23.7 million | $104.9 million |
| FFO | $122.5 million | $110.1 million |
| Cash provided by operating activities | $131.1 million | $117.9 million |
| Cash and cash equivalents, year-end | $19.3 million | $12.8 million |
| Total debt, year-end | $1,249.2 million | $1,179.8 million |
NOI was approximately 66.1% of rental revenue, compared with 66.4% in 2011. Real estate expenses were 33.9% of revenue versus 33.6%. These are simple calculations from reported figures; NOI and FFO are non-GAAP supplemental measures, not substitutes for GAAP earnings or operating cash flow.
Same-store NOI declined 0.3% to $176.6 million. Year-end occupancy fell to 88.2% from 90.9%; office occupancy was 84.8%, medical office 85.6%, retail 91.2% and multifamily 94.1%. Debt comprised $343.0 million of mortgages and $906.2 million of unsecured notes; there were no revolver borrowings and $499.2 million of unused capacity after letters of credit. Total assets were $2.124 billion and shareholders’ equity was $792.1 million.
Changes versus the prior comparable period
- Revenue rose 7.3% and NOI rose 6.8%, primarily reflecting acquisitions. Same-store NOI slipped as lower occupancy and higher real estate taxes outweighed rent gains and lower utility costs.
- Net income fell sharply from $104.9 million to $23.7 million, mainly because 2011 included a $97.5 million gain on property sales, compared with $5.1 million in 2012. Continuing operations improved from a $2.9 million loss to $17.1 million of income.
- FFO increased 11.3%, aided by the absence of the $14.5 million Dulles Station, Phase II impairment recorded in 2011.
- Operating cash flow increased $13.2 million. Investing activities used $88.5 million, compared with $61.1 million provided in 2011, which included substantial sale proceeds.
- Debt increased by $69.4 million. WRIT issued $300 million of 3.95% notes due 2022 and used proceeds in part to repay credit-line borrowings and mortgages.
- The quarterly dividend was reduced 31% in the third quarter, from $0.43375 to $0.30 per share. Full-year declared and paid dividends were $1.4675 per share, versus $1.7350 in 2011.
Outlook, commentary and risks
- Management anticipated continued difficulty leasing vacant space in 2013 and warned that new and renewal rents could be below existing portfolio rents, pressuring same-store NOI. The Washington office market weakened in 2012: regional vacancy rose to 13.4%, effective rents fell 2.9%, and net absorption was negative 2.9 million square feet.
- WRIT expected 2013 capital needs to include $55–$65 million for its operating portfolio, $30–$35 million for development, and funding for leasing, dividends and potential acquisitions. Management believed operating cash flow and capital access would be sufficient, but noted that outcome depended on market conditions and property performance.
- A $60 million unsecured note matured in 2013; the company expected to fund repayment with revolver borrowings and/or property-sale proceeds. It repaid the remaining $30 million West Gude Drive mortgage in January 2013. Loan covenants were reported in compliance at year-end.
- WRIT planned to explore selling all or part of its medical office segment in 2013 to refocus and fund portfolio upgrades. No sale was assured, and proceeds might not be reinvested promptly or generate enough income to offset disposed earnings.
- The 650 North Glebe multifamily development was expected to begin construction in early 2013 and reach completion in fourth-quarter 2014, subject to financing and execution. Construction at 1225 First Street was delayed after year-end because of market conditions and oversupply concerns.
- Other notable items: a $2.1 million impairment was recorded on Kenmore Avenue land after development was deemed no longer probable; CEO George F. McKenzie announced plans to retire by the end of 2013; and management cited federal-budget uncertainty, including potential spending cuts, as a regional leasing and tenant-credit risk. WRIT’s geographic concentration in the Washington region also heightens exposure to local economic conditions.
- Legal proceedings were described as ordinary-course matters not expected by management to have a material adverse effect. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether occupancy and same-store NOI stabilized or declined further, particularly in office properties, and whether leasing costs and concessions rose.
- Whether the proposed medical office sale occurred, its net proceeds and earnings impact, and how proceeds were reinvested.
- How the $60 million 2013 note maturity and subsequent debt maturities were funded, and whether leverage, borrowing costs or covenant headroom changed.
- Whether the 31% dividend reduction was sufficient to align distributions with recurring cash flow and capital needs.
- Development timelines, financing and expected returns for 650 North Glebe, and the status of the delayed 1225 First Street project.
- The effects of federal spending changes and the CEO succession on tenant demand, renewals and execution of WRIT’s strategy.