Business context and reporting period
Washington Real Estate Investment Trust (WRIT), the issuer named in this filing, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Its portfolio in the greater Washington, D.C. region included office, medical office, retail, multifamily and industrial/flex properties. At quarter-end it owned 86 properties, with approximately 10.8 million square feet of commercial space and 2,540 multifamily units. The filing is from 2011 and does not use the Elme Communities name.
Financial and operating performance
Amounts below are in millions except per-share data and ratios.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Rental revenue | $80.6 | $72.4 | $158.7 | $146.0 |
| Net operating income (NOI) | $54.4 | $49.2 | $106.4 | $96.6 |
| Income from continuing operations | $7.7 | $6.1 | $12.9 | $10.5 |
| Net income attributable to controlling interests | $6.5 | $15.0 | $11.2 | $20.2 |
| FFO | $33.2 | $30.7 | $63.1 | $59.5 |
| Operating cash flow | Not separately presented for the quarter | $60.0 | $61.9 |
- Q2 NOI margin was approximately 67.5% of rental revenue, versus 68.0% a year earlier; first-half margin was approximately 67.1%, versus 66.2%.
- Q2 basic and diluted EPS were $0.10, versus $0.24 in 2010; continuing-operations EPS improved to $0.12 from $0.10. First-half EPS was $0.17 versus $0.33, while continuing-operations EPS was $0.19 versus $0.17.
- Dividends declared and paid were $0.4338 per share in Q2 and $0.8675 for the first half, modestly above the comparable 2010 amounts.
- At June 30, cash and cash equivalents were $42.9 million and restricted cash was $23.6 million. Total debt was $1.283 billion, comprising $378.5 million of mortgages, $245.0 million drawn on credit facilities and $659.9 million of notes payable. Total debt at year-end 2010 was $1.234 billion.
- Total assets were $2.187 billion and total liabilities were $1.364 billion. Q2 interest expense was $17.1 million; first-half interest expense was $34.2 million.
Material changes versus prior comparable periods
- Q2 rental revenue rose 11.3% and NOI rose 10.4%, driven primarily by acquisitions. Same-store Q2 NOI increased 0.9%; management said higher rental rates and lower operating expenses were offset by reduced occupancy. First-half same-store NOI rose 1.0%.
- Overall occupancy fell to 87.9% from 89.0% a year earlier. Office occupancy was 88.7% (90.6%); retail 92.0% (94.4%); industrial 78.4% (79.3%); medical office 87.3% (88.0%); and multifamily 95.6% (95.0%).
- Controlling-interest net income declined because 2010 included a $7.9 million gain on sale of the Parklawn Portfolio. Q2 2011 also included $1.2 million of income tax expense related to the Dulles Station sale. First-half discontinued operations recorded a $0.6 million impairment and a $0.5 million loss.
- First-half investment cash outflow increased to $91.2 million from $56.0 million, reflecting acquisitions and development spending. Operating cash flow decreased by $1.9 million year over year. Cash fell from $78.8 million at year-end to $42.9 million.
- WRIT acquired two office buildings for $127.3 million and land for a planned 150-unit apartment project; it sold Dulles Station, Phase I, for a contract price of $58.8 million. It repaid $93.9 million of 5.95% notes at maturity, using credit-facility borrowings and sale proceeds.
Outlook, commentary, risks and unusual items
- Management reported continued difficulty leasing vacant commercial space. During the first half, 69.0% of expiring commercial space was renewed, and new leases averaged a 5.4% rental-rate increase over expiring leases. A large retail tenant’s bankruptcy led to a $0.7 million receivable write-off.
- Management estimated 2011 capital requirements including $35–$45 million for existing assets, $25–$30 million for development, approximately $1 million for first-generation tenant costs, and approximately $182.4 million for known acquisitions (including $127.3 million already closed). The filing gives no earnings or FFO guidance.
- After quarter-end, WRIT replaced a $262 million credit facility with a $400 million facility maturing July 1, 2014, with a one-year extension option and potential accordion capacity to $600 million subject to lender commitments. The stated spread was LIBOR plus 122.5 basis points. At quarter-end, $245 million was drawn on the existing facilities, with $1.7 million in letters of credit.
- On August 5, 2011, WRIT contracted to sell its entire industrial segment and two office properties for an aggregate $350 million, at a gain, with closings expected in the third and fourth quarters. Completion and proceeds were not assured at filing date.
- Management said it was in compliance with debt covenants at June 30. It warned that covenant breaches could accelerate debt and restrict borrowing; greater reliance on variable-rate credit facilities could expose earnings to adverse interest-rate movements. Remaining 2011 debt maturities were $14 million, expected to be funded through some combination of new debt, property sales and equity issuance.
- Other identified risks include federal spending and regional economic conditions, leasing and tenant credit, capital availability and cost, interest rates, competing properties, regulation, and general economic conditions. The filing reported no legal proceedings and no risk-factor changes in Part II.
Important facts for investors to verify
- Whether the $350 million industrial-segment and office-property sale closed on schedule, and the realized gain, taxes and use of proceeds.
- Leasing progress and occupancy trends, particularly in office, retail and industrial properties, and the effect of the retail tenant bankruptcy.
- Funding and refinancing plans for debt maturities, facility utilization, covenant headroom and exposure to variable interest rates.
- Whether operating cash flow adequately supports dividends and planned capital spending; management cautioned that a significant cash-flow decline could require borrowing to sustain dividends or a dividend reduction.
- Progress, cost and financing of the 150-unit Arlington development, including the joint venture’s planned debt funding.