Washington Real Estate Investment Trust — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The registrant in this filing is Washington Real Estate Investment Trust (WRIT), a Washington-region real estate owner and operator; the supplied filing does not identify it as Elme Communities. Financial statements are unaudited.
Business context and results
At quarter-end, WRIT owned 71 properties, with approximately 8.6 million square feet of commercial space and 2,540 multifamily units, across office, medical office, retail, and multifamily segments. The company acquired the 147,000-square-foot Fairgate at Ballston office property for $52.3 million during the nine-month period and sold 1700 Research Boulevard for $14.3 million. The Atrium Building and Plumtree Medical Center were classified as held for sale.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Rental revenue | $77.1 million | $70.6 million | $227.9 million | $208.7 million |
| Net operating income (NOI) | $50.2 million | $47.0 million | $150.4 million | $139.1 million |
| Net income attributable to controlling interests | $9.6 million | $63.0 million | $20.8 million | $74.2 million |
| FFO, as defined by NAREIT | $32.1 million | $30.8 million | $94.8 million | $94.4 million |
| Basic earnings per share | $0.14 | $0.95 | $0.31 | $1.12 |
Quarterly rental revenue rose 9.3% and NOI rose 6.8%, primarily reflecting acquisitions. Same-store NOI fell 1.4% in the quarter and 0.9% for the nine-month period. NOI margin was approximately 65.1% in Q3 2012 versus 66.6% in Q3 2011. Net income fell sharply year over year because Q3 2011 included a $56.6 million real estate sale gain; Q3 2012 included a $3.7 million gain.
Q3 occupancy was 89.2% overall, down from 90.3% a year earlier. Office occupancy declined to 86.2% from 88.5%; medical office was 84.6% versus 87.0%. Retail occupancy improved to 92.8% from 92.3%, and multifamily to 94.8% from 94.0%.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $92.8 million, compared with $86.4 million in 2011. Investing used $80.1 million, including $52.1 million of net real estate acquisitions and $36.3 million of capital improvements. Financing provided $43.0 million; cash increased $55.6 million to $68.4 million.
- Total debt was $1.309 billion at September 30, 2012, versus $1.184 billion at year-end 2011. The balance included $906.1 million of unsecured notes and $398.5 million of mortgage debt; revolving credit facilities had no borrowings outstanding.
- WRIT issued $300 million of 3.95% unsecured notes due 2022, receiving $296.4 million net. The proceeds were used in part to repay revolving-credit borrowings and mortgage debt. Credit facilities had $499.2 million of remaining capacity after letters of credit.
- Cash and cash equivalents were $68.4 million; restricted cash was $19.6 million. The company reported compliance with debt covenants. Earnings-to-fixed-charges and debt-service-coverage ratios were 1.30x and 2.80x, respectively, for Q3.
- Quarterly dividends were $0.30 per share, reduced from $0.4375. Nine-month dividends paid were $77.8 million. Management noted that sustaining the dividend depends on operating cash flow and could require borrowing or a further reduction if cash flow declines.
Material changes, outlook, and risks
- Management said Washington-area property conditions were challenging and expected them to remain so through the rest of 2012 and into 2013. It cited federal budget and broader economic uncertainty as weighing on tenant decisions and leasing activity. No formal earnings or FFO guidance is provided in the filing.
- Higher same-store real estate tax assessments contributed to NOI pressure. Management also cited difficulty leasing vacant office space; regional office vacancy was reported at 13.1%, up from 12.1% a year earlier.
- During the nine-month period, new commercial leases covered 686,762 square feet at average rental rates 12.1% above expiring leases. Renewal rates were 61.7%, compared with 65.9% in the comparable 2011 period.
- Management estimated 2012 investment needs of $45–$60 million for existing operating properties, including $20–$25 million for tenant-related costs and leasing commissions, and approximately $7 million for development projects. Two multifamily joint ventures were expected to cost a combined approximately $144.3 million and were then expected to complete in Q4 2014.
- Key disclosed risks include federal spending changes, regional economic conditions and tenant health, leasing and occupancy, capital availability and cost, interest-rate movements, competing supply, and compliance with debt covenants. A credit-rating downgrade in August increased revolving-facility margins from 107.5 to 120 basis points.
- The filing reclassified prior-period acquisition costs and impairment charges within the income statement; management said this did not change continuing income, net income, cash flows, or other operating measures. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether office and medical-office occupancy and same-store NOI stabilize, given lower occupancy and higher property taxes.
- The sustainability of the $0.30 quarterly dividend relative to operating cash flow, recurring property investment, and leasing costs.
- Debt maturities, covenant headroom, the effect of the August credit-rating downgrade, and access to the $499.2 million of reported available credit capacity.
- Actual costs, financing, leasing progress, and delivery timing for the two development projects; the filing’s completion dates are management expectations.
- How much reported earnings and cash generation depend on property acquisitions and dispositions versus ongoing same-store operations.