Business context and reporting period
Washington Real Estate Investment Trust (WashREIT; identified in the request as Elme Communities) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. Its portfolio centered on the Washington, D.C. metro area and included 22 multifamily properties, 16 office properties, eight retail centers, and development land.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Rental revenue | $76.8 million | $71.4 million |
| Net income (loss) | $1.7 million | $(4.4) million |
| Net operating income (NOI) | $48.2 million | $45.3 million |
| NOI margin | 62.7% | 63.4% |
| NAREIT FFO | $31.4 million | $33.5 million |
| Cash from operations | $28.9 million | $27.6 million |
- Rental revenue rose 7.5% and NOI rose 6.3%; same-store NOI declined 1.6%. Same-store ending occupancy fell to 91.6% from 92.7%.
- Operating cash flow exceeded investing cash outflow of $20.3 million; financing cash outflow was $2.0 million. Cash, cash equivalents and restricted cash ended at $21.2 million.
- At March 31, total debt carrying value was approximately $1.145 billion, including $997.1 million of notes and $148.0 million drawn on the revolver. The company had $552 million of unused revolver capacity then. Total assets were $2.623 billion and total equity was $1.358 billion.
- Dividends declared were $0.30 per share, unchanged from Q1 2019. Cash dividends paid were $49.5 million.
Material changes versus the prior period
- Net income improved by $6.1 million, primarily reflecting no repeat of the prior-year $8.4 million impairment charge, higher NOI, lower interest and general and administrative expenses, and a $0.5 million debt-extinguishment gain. This was partly offset by the absence of $6.0 million of discontinued-operations income and higher depreciation.
- Revenue and NOI benefited from 2019 multifamily acquisitions, partly offset by property sales and a $0.6 million decline in same-store NOI. Same-store office revenue fell 4.6%; same-store multifamily revenue rose 3.2%.
- NAREIT FFO declined 6.2%, mainly because 2019 included income from retail properties subsequently sold and classified as discontinued operations.
- Q1 comprehensive loss was $32.8 million, driven by $34.6 million of unrealized losses on interest-rate hedges recorded in other comprehensive loss.
Outlook, risks and unusual items
- Management said COVID-19 had not significantly affected Q1 results but expected a material impact on subsequent rental revenue, collections, credit losses, leasing and cash flows; the extent could not be reasonably estimated. Management reported rent deferrals, abatements and credit losses were expected among commercial tenants. As of April 21, 9% of office tenants and 5% of multifamily tenants had not made full April rent payments.
- The company reported about 300,000 square feet of vacant commercial space and about 200,000 square feet of commercial lease expirations for the rest of 2020. Multifamily measures included freezing renewal rents, waiving late fees, halting evictions and offering payment deferrals. Cost-saving initiatives were underway.
- Management reduced estimated 2020 capital requirements by about $40 million. Current estimates included $55–$60 million for existing operating properties and $30–$35 million for development and redevelopment; the company no longer expected to start the Riverside development in 2020.
- After quarter-end, WashREIT prepaid $250 million of 4.95% senior notes using revolver borrowings and sold John Marshall II for $57 million on April 21, below the prior $63.4 million contract price. As of April 23, revolver borrowings were $398 million, leaving $302 million available; a potential $150 million term loan was subject to final documentation.
- WashREIT said it had adequate liquidity for major needs through 2020 and was in compliance with debt covenants at March 31, while cautioning that worsening conditions could affect future compliance and access to capital. The $700 million revolving facility was scheduled to mature in March 2022, with two six-month extension options.
- The Trove, a 401-unit multifamily development, had delivered 121 units during the quarter; the remaining development was expected to enter service during 2020. No Q1 real estate impairment was recorded. The company reported no legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Subsequent rent collections, tenant relief requests, credit losses and occupancy, particularly as pandemic effects extended beyond the quarter.
- Actual revolver borrowings and available liquidity after the senior-note repayment, and whether the proposed term loan was finalized.
- Progress on covenant compliance, refinancing needs and debt maturities, including the $150 million due in 2021.
- Whether planned capital reductions, development spending and the expected completion of The Trove remained on schedule.
- The effect of the John Marshall II sale price and continued commercial leasing performance on property values and results.