Business context and reporting period
This is Washington Real Estate Investment Trust’s (WRIT) Form 10-K for the fiscal year ended December 31, 2011, filed February 27, 2012. WRIT was a self-managed REIT focused on the greater Washington, D.C. region, with office, medical office, retail and multifamily properties. The filing describes a portfolio of 71 properties, approximately 8.6 million square feet of commercial space and 2,540 residential units. The request metadata names Elme Communities, but the filing itself is for WRIT; verify the intended issuer and historical entity mapping.
Financial results and key metrics
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Real estate rental revenue | $289.5 million | $258.5 million | Up 12.0%, primarily from acquisitions |
| Net operating income (NOI) | $192.3 million | $171.8 million | Up 11.9%; NOI margin was approximately 66.4%, versus 66.5% |
| Same-store NOI | $168.3 million | $168.1 million | Up 0.1%; higher rents were largely offset by lower occupancy and other factors |
| Continuing-operations income | Loss of $1.1 million | Income of $1.0 million | Includes a $14.5 million impairment charge in 2011 |
| Net income attributable to controlling interests | $104.9 million | $37.4 million | 2011 included a $97.5 million gain on real estate sales |
| Diluted earnings per share | $1.58 | $0.60 | Continuing-operations diluted EPS was a loss of $0.02 in 2011 |
| FFO | $110.1 million | $111.6 million | Down $1.5 million, or about 1.4% |
| Cash from operating activities | $117.9 million | $111.9 million | Up $6.0 million |
| Dividends declared and paid per share | $1.735 | $1.7313 | Cash common dividends totaled $115.0 million |
At year-end, total debt was $1.184 billion, comprising $657.5 million of unsecured notes, $427.7 million of mortgage debt and $99.0 million drawn on credit facilities. Cash and cash equivalents were $12.8 million; available borrowing capacity was approximately $375.2 million. Total assets were $2.121 billion and shareholders’ equity was $859.0 million. Fixed-rate mortgage debt had a 5.9% effective weighted-average rate and 5.0-year weighted-average maturity. The company reported compliance with debt covenants.
Portfolio occupancy was 90.8%, down from 91.3%. Segment occupancy was 89.0% for office, 86.5% for medical office, 93.3% for retail and 94.9% for multifamily. Real estate expenses were 33.6% of rental revenue, broadly consistent with 33.5% in 2010.
Material changes versus the prior comparable period
- Revenue and NOI growth chiefly reflected acquisitions; same-store NOI was nearly flat. Depreciation and amortization increased by $13.2 million, primarily due to acquired properties.
- WRIT sold its industrial segment and two office properties for a combined contract price of $350.9 million, recording a $97.5 million gain. It also sold Dulles Station, Phase I, for $58.8 million. These transactions materially increased reported net income while reducing income from disposed properties.
- Acquisitions included four office buildings, one retail property and two parcels of land for multifamily development. The filing reports a total 2011 contract purchase price of $385.4 million, including the development land.
- In the fourth quarter, WRIT recorded a $14.5 million impairment on Dulles Station, Phase II, reducing the land and garage carrying value to $12.1 million after determining development was not probable under then-current market conditions.
- Debt declined from $1.215 billion at year-end 2010 to $1.184 billion at year-end 2011. Cash fell from $78.8 million to $12.8 million, while financing activities used $245.0 million of cash.
Outlook, commentary and risks
Management expected slow but steady improvement in the Washington-area market during 2012, while anticipating continued difficulty leasing vacant space and possible downward pressure on NOI from new or renewal rents below existing portfolio rents. It planned to pursue acquisitions, but cautioned that acquisition-related costs could offset resulting NOI growth.
For 2012, management expected $45–$60 million of investment in existing operating properties, approximately $12.9 million of development spending and approximately $15.2 million of tenant-related capital improvements. WRIT also faced $71.7 million of debt maturities and a $75.0 million credit line expiring in 2012; it expected to refinance or fund maturities through some combination of new debt, asset sales and equity. Management stated that it believed operating cash flow and capital access would be sufficient, but gave no earnings or FFO guidance.
- Key exposures include the Washington region’s dependence on federal spending, tenant credit and lease renewals, office-market vacancy, interest rates, refinancing access and compliance with debt covenants.
- Management identified real estate development, acquisition integration, illiquidity, competition, environmental liabilities, uninsured losses, REIT qualification and dividend sustainability as risks. It warned that dividends could be reduced if operating cash flow weakened.
- The filing reports no material legal proceedings under Item 3. Management and the auditor concluded that internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls.
Important facts investors should verify
- Confirm the issuer: the supplied filing is WRIT’s 2011 Form 10-K, not a filing under the name Elme Communities.
- Review the audited statements and notes for the sale proceeds, gain recognition and discontinued-operations treatment; 2011 net income was substantially affected by property-sale gains.
- Assess the Dulles Station, Phase II impairment, its Level 3 valuation assumptions and whether future development plans or carrying values change.
- Check progress refinancing the 2012 debt maturities and expiring credit line, current borrowing capacity, interest costs and covenant headroom.
- Track same-store occupancy, leasing spreads, renewal rates and tenant improvement costs, especially in office and medical office properties.
- Evaluate whether operating cash flow supports dividends after capital spending and development commitments; FFO is a non-GAAP measure and does not equal cash available for distributions.