Business context and reporting period
Washington Real Estate Investment Trust (WashREIT; NYSE: WRE), the registrant identified in this 10-Q, reported the quarter and nine months ended September 30, 2021. Its strategy shifted away from commercial real estate toward residential communities, principally in the Washington, D.C. metro and Southeastern markets. After selling its office and retail portfolios, it reported one operating segment: residential. The filing states that it owned approximately 7,300 apartment homes and about 300,000 square feet of commercial space at quarter-end.
Key financial metrics
Amounts below are in millions, except per-share data, percentages, and occupancy.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Rental revenue, continuing operations | $42.5 | $43.7 | $124.4 | $133.2 |
| Net income (loss), consolidated | $31.3 | $(1.0) | $23.2 | $(4.6) |
| Loss from continuing operations | $(22.3) | $(7.0) | $(46.3) | $(24.7) |
| NAREIT FFO | $3.1 | $29.5 | $52.2 | $92.7 |
| Net cash from operating activities | Not separately presented for the quarter | $66.4 | $84.2 |
- Sale-related items: Discontinued operations contributed $53.6 million of Q3 income, including a $46.4 million net gain on the office and retail sales. For the nine months, discontinued operations income was $69.5 million, also including that gain. The gain materially boosted GAAP net income; it is excluded from NAREIT FFO.
- Operations and margins: Q3 total NOI was $27.1 million, down 2.0%; nine-month NOI was $79.2 million, down 8.1%. Residential same-store NOI declined 0.4% in Q3 and 3.7% for the nine months. Residential real estate expenses were 37.2% of residential revenue in Q3 versus 37.6%; for the nine months, 37.3% versus 35.9%.
- Occupancy and rent: Same-store residential occupancy at September 30 was 95.8%, up from 94.3% a year earlier. Management said same-store rental revenue was pressured by lower rental rates and higher rent abatements during the nine-month period.
- Debt and liquidity: At September 30, notes payable, net were $496.8 million; the $700 million revolving facility was undrawn. Cash and cash equivalents were $307.8 million. At October 26, the company reported $297.1 million cash and $700 million available on the revolver, or $997.1 million total liquidity. Debt principal was $500 million, with $100 million due in 2023 and $400 million thereafter; weighted-average maturity was 7.5 years and average interest rate 4.1%.
- Cash flow and distributions: Nine-month operating cash flow fell 21.2% to $66.4 million. Investing cash flow was $823.2 million, driven mainly by property-sale proceeds; financing cash flow was $(589.5) million, including debt repayments and $76.3 million of dividends paid. Dividends declared were $0.17 per share in Q3 and $0.77 for the nine months.
- Balance sheet: Total assets were $1.85 billion at September 30, down from $2.41 billion at year-end 2020, reflecting portfolio sales and related balance-sheet changes. Total equity was $1.30 billion.
Material changes versus the prior comparable period
- WashREIT sold twelve office properties for a $766.0 million contract price, closing July 26, 2021, and eight retail properties for $168.3 million, closing September 22. The transactions generated a combined net gain of $46.4 million and completed a major strategic move toward residential real estate.
- Q3 net income improved from a $1.0 million loss to $31.3 million, primarily due to the sale gain. In contrast, continuing-operations losses widened, and NAREIT FFO fell to $3.1 million from $29.5 million.
- Nine-month rental revenue declined 6.6% and NOI declined 8.1%. Comparisons reflect significant property sales and are not fully like-for-like. Same-store residential rental revenue fell 1.9% for the nine months, while same-store expenses increased 1.6%.
- The company acquired The Oxford, a 240-unit Georgia apartment community, for $48.0 million in August. After quarter-end, it signed an agreement to acquire two Georgia communities totaling 490 units for $106.0 million, with closing anticipated in Q4 subject to customary conditions.
- Using sale proceeds, it redeemed $300 million of unsecured notes originally due in 2022 and prepaid $150 million of its term loan. It reported no debt maturities before 2023. The prepayments and related hedge actions generated substantial one-time charges.
Outlook, commentary, and risks
- Management said it intends to use disposition proceeds to expand the residential platform in Southeastern markets and reduce leverage, and believes the strategic shift can support more sustainable growth. No formal earnings or operating guidance is provided in the supplied filing text.
- Management reported collecting 99% of cash rent at same-store communities during Q3 as of October 26. It said rental rates had declined during the quarter but expected rates to increase in the remainder of 2021 as market conditions improved. It also reported improved occupancy and lower credit losses compared with Q3 2020.
- Management expected COVID-19 to continue affecting rental revenue, credit losses, and leasing activity; the scale and duration of the impact remained uncertain. Geographic concentration in the Washington, D.C. region could increase exposure to local disruptions.
- Other risks include execution and integration of acquisitions in unfamiliar Southeastern markets, the ability to realize expected returns, real-estate market and tenant conditions, access to capital and refinancing, interest-rate exposure, and compliance with debt covenants. The company said it was in covenant compliance at September 30 and had no material off-balance-sheet arrangements.
- Unusual charges included $12.7 million of Q3 debt-extinguishment losses, chiefly the $11.9 million prepayment penalty on the $300 million notes, and $5.9 million of nine-month losses on interest-rate derivatives. Transformation costs were $1.0 million in Q3 and $4.8 million for the nine months. Management stated it believed liquidity was adequate for the next 12 months.
- Full-year 2021 capital requirements included estimated $25–30 million for existing operating assets, including $2.5–7.5 million for tenant-related work and leasing commissions, and $7.5–10 million for development and redevelopment, in addition to dividends and potential acquisitions or debt reduction. These were estimates, not guaranteed amounts.
Important facts for investors to verify
- Confirm how much of reported earnings and the 2021 improvement reflects the $46.4 million portfolio-sale gain, versus recurring residential operations and NAREIT FFO.
- Track same-store rental rates, concessions, expense growth, occupancy, and the trajectory of NOI as the portfolio transitions and COVID-related conditions evolve.
- Verify completion, financing, and expected returns for the proposed $106 million Georgia acquisition, and assess whether further acquisitions meet management’s stated strategic and leverage objectives.
- Monitor debt repayment and refinancing plans, the 2023 term-loan maturity, revolver availability, interest-rate exposure, and compliance with covenants.
- Assess dividend sustainability against operating cash flow, capital requirements, and management’s stated quarterly review of dividends.