Elme Communities annual report, FY2017

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Business context and reporting period

Washington Real Estate Investment Trust (Washington REIT), the registrant named in this filing, reports the fiscal year ended December 31, 2017. The request identifies Elme Communities; that name does not appear as the registrant in the supplied filing. Washington REIT was a Washington, DC-area equity REIT owning office, multifamily and retail properties.

At year-end, the portfolio comprised 49 properties: 20 office buildings, 13 multifamily properties and 16 retail centers, plus development land. The filing reports approximately 9.95 million square feet across its properties and 4,268 residential units. All properties were in the greater Washington metro region.

Financial and operating metrics

  • Revenue: Real estate rental revenue was $325.1 million, up 3.8% from $313.3 million in 2016.
  • Profit: Net income attributable to controlling interests was $19.7 million, or $0.25 per diluted share, versus $119.3 million, or $1.65 per share, in 2016. The 2017 net income margin was approximately 6.0%.
  • Property operations: Net operating income (NOI), a non-GAAP measure, increased 5.6% to $209.4 million. Same-store NOI rose 6.0% to $175.9 million. NOI was approximately 64.4% of rental revenue, compared with 63.3% in 2016.
  • FFO: NAREIT funds from operations increased 11.9% to $141.0 million from $126.0 million. The filing cautions that FFO is not GAAP net income or cash available for distributions.
  • Cash flow: Operating cash flow was $130.6 million, compared with $114.7 million. Investing activities used $196.4 million; financing activities provided $60.7 million. Year-end cash and cash equivalents were $9.8 million, plus $2.8 million of restricted cash.
  • Debt and equity: Year-end debt totaled $1.155 billion: $894.4 million unsecured notes, $166.0 million credit-facility borrowings and $95.1 million mortgage debt. Shareholders’ equity was $1.095 billion. The filing reported approximately $434 million of unused capacity under the $600 million revolving facility at year-end. It also reported $19.1 million cash and $257 million facility availability as of February 15, 2018.
  • Liquidity and distributions: Dividends were $1.20 per share for 2017, unchanged from 2016; cash dividends declared totaled $92.8 million. The quarterly rate was $0.30 per share. Management said it expected cash flow, asset-sale proceeds and capital-market access to fund 2018 needs, but noted this was not assured.
  • Leasing: Year-end leased rates were 95% for office, 97% for multifamily and 94% for retail; combined office and retail leased occupancy was 95%. Total ending occupancy was 91.8%.

Material changes versus the prior comparable period

  • Net income fell sharply, primarily because gains on real estate sales declined by $76.8 million and 2017 included $33.2 million of net impairment and casualty charges; 2016 had a $0.7 million net casualty gain. Lower gains and impairment more than offset stronger property operations and lower interest expense.
  • Rental revenue rose $11.8 million. Same-store revenue increased 4.0%, with office up 6.7%, multifamily 1.5% and retail 1.3%. Same-store expenses increased only 0.5%.
  • Interest expense decreased 10.5% to $47.5 million, principally reflecting lower mortgage interest after debt repayments, partly offset by higher notes and credit-line costs.
  • Operating cash flow improved by $15.9 million. Investing cash use increased substantially, partly because 2017 had much less property-sale proceeds than 2016.
  • Debt increased from $1.112 billion to $1.155 billion. Common shares outstanding rose from 74.6 million to 78.5 million, reflecting equity issuance; the company raised $113.2 million net through its at-the-market program in 2017.

Outlook, commentary, risks and unusual items

  • 2018 capital plans: Management estimated $85–$95 million for existing operating assets, including $30–$35 million for tenant-related capital and leasing commissions; $45–$50 million for development and redevelopment; and approximately $28 million in total tenant-related capital improvements. It also anticipated repayment or refinancing of a secured note, with disclosures citing $31.6 million in expected capital requirements and a $32.2 million Kenmore mortgage balance. Funding for acquisitions was expected to be offset partly by property dispositions.
  • Portfolio activity: Washington REIT acquired Watergate 600 for a contract price of $135 million and sold Walker House Apartments for $32.2 million, recognizing a $23.8 million gain. It sold Braddock Metro Center for $93 million in January 2018 and acquired Arlington Tower for $250 million, funded with facility borrowings and sale proceeds. It agreed to sell 2445 M Street for $100 million, with closing expected in the third quarter of 2018; completion was not assured.
  • Impairments: 2017 included $24.1 million impairment on 2445 M Street and $9.1 million on Braddock Metro Center. The filing also describes impairment write-downs in its real-estate schedule; investors should consult the notes for presentation and reconciliation details.
  • Market risks: The company is concentrated in the Washington metro region. Its disclosures cite federal spending and political uncertainty, local office supply and vacancy, multifamily deliveries and rent growth, retail competition from e-commerce, tenant retention, rising rates, refinancing availability and property operating costs as risks. The regional office vacancy rate increased to 17.0% in 2017, while market sources anticipated pressure on occupancy and effective rents in 2018.
  • Other risks and contingencies: Debt covenant compliance and refinancing, development execution, environmental or casualty losses, cyber incidents, and REIT qualification and distribution requirements could affect results and liquidity. The company reported no material litigation proceedings, no outstanding third-party development contracts at year-end, and no material off-balance-sheet arrangements. It stated it was in compliance with debt covenants.
  • Reporting and unusual items: The 2017 fourth quarter recorded $81.3 million rental revenue, $2.3 million net income and $0.03 diluted EPS; quarterly figures included a $24.9 million gain on sale and $28.2 million of impairments. Management and the auditor reported effective internal controls, and the auditor issued an unqualified opinion on the financial statements. The Tax Cuts and Jobs Act was enacted in December 2017; management did not expect it to materially affect REIT qualification.

Important facts for investors to verify

  1. Confirm the issuer identity: this is Washington REIT’s 2017 Form 10-K, not a filing under the name Elme Communities.
  2. Review the financial-statement notes and impairment valuation assumptions for 2445 M Street and Braddock Metro Center, and reconcile the impairment disclosures.
  3. Track execution and proceeds from the 2018 Braddock Metro Center and proposed 2445 M Street sales, alongside the Arlington Tower acquisition funding and leverage impact.
  4. Assess lease rollover, tenant-improvement and leasing-commission requirements, especially the low 51.4% office retention rate in 2017 and the large office expirations disclosed for 2019.
  5. Evaluate debt maturities, variable-rate exposure, covenant headroom and refinancing needs, including the revolving facility maturity and expected Kenmore mortgage prepayment.
  6. Compare operating cash flow and FFO with dividends and recurring capital needs; the filing states dividends depend on operating performance, cash availability and board discretion.