Elme Communities (Washington Real Estate Investment Trust) — Q3 2010 Form 10-Q
Business context and reporting period
The filing is for the quarter and nine months ended September 30, 2010. The registrant, then Washington Real Estate Investment Trust (WRIT), owned and operated a diversified portfolio in the greater Washington, D.C. region. At quarter-end it reported 88 properties, approximately 10.9 million square feet of commercial space, 2,540 multifamily units and land held for development. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Financial and operating highlights
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Rental revenue | $76.3 | $75.0 | $227.9 | $227.2 |
| Property NOI | $51.1 | $49.4 | $151.2 | $149.6 |
| Net income attributable to controlling interests | $6.6 | $9.6 | $26.8 | $33.5 |
| FFO | $30.9 | $28.0 | $90.4 | $92.1 |
| Diluted EPS | $0.10 | $0.16 | $0.43 | $0.60 |
- Q3 NOI margin was approximately 67% of rental revenue. Real estate expenses were 33.0% of revenue in the quarter and 33.7% for the nine-month period.
- Nine-month operating cash flow was $83.5, versus $81.3 a year earlier. Investing used $61.8, while financing provided $229.5. Cash and cash equivalents were $262.4 at September 30; restricted cash was another $19.9.
- Total debt was $1,411.3 at quarter-end, up from $1,222.4 at December 31, 2009: $930.2 of notes payable, $381.1 of mortgage debt and $100.0 drawn on credit lines. The balance sheet reported total liabilities of $1,486.1 and total equity of $824.9.
- Two revolving credit facilities had $235.3 of unused and available capacity, net of outstanding letters of credit. The facilities mature in June and November 2011.
- Quarterly dividend declared and paid was $0.4325 per share, unchanged from Q3 2009. Nine-month dividends were $1.2975 per share.
Material changes versus comparable periods
- Q3 revenue increased 1.7% and NOI increased 3.5%. Management attributed the gains mainly to the Quantico Corporate Center acquisition, higher multifamily occupancy and rental rates, and lower property tax assessments. Core-property occupancy weakness partly offset these gains.
- Q3 net income attributable to controlling interests fell $2.9 million, largely because Q3 2009 included a $5.1 million property-sale gain. FFO rose $2.9 million, supported by higher NOI and lower interest expense.
- For nine months, revenue was nearly flat and NOI rose 1.0%, but controlling-interest net income declined to $26.8 million from $33.5 million. Prior-year results included larger property-sale gains and a $6.9 million gain on extinguishment of debt; 2010 included a $0.3 million debt-extinguishment loss. FFO decreased to $90.4 million from $92.1 million.
- Economic occupancy was 90.3% in Q3, down from 93.3%. Office, medical office, retail and industrial occupancy declined; multifamily improved. Industrial occupancy was 83.0%, compared with 89.6%.
- WRIT acquired two fully leased Quantico office buildings for $68.0 million and sold the Parklawn Portfolio for a contract price of $23.4 million, recognizing a $7.9 million gain. It issued 4.0 million shares under its sales-agency program for $118.1 million of nine-month net proceeds.
Outlook, commentary, risks and unusual items
- Management described the Washington-area recovery as slow and cited tenant demand and lower occupancy as concerns. It reported 1.245 million square feet of commercial leases executed during the first nine months, with average rental rates 13.4% above expiring leases; only 56.1% of expiring commercial area was renewed, versus 72.3% in the prior-year period.
- Management estimated 2010 capital needs of $35–$45 million for existing properties, about $5 million for first-generation tenant costs, about $3 million for development and $70–$200 million for acquisitions. It expected operating cash flow and capital-market access to fund requirements, but cautioned that capital availability and property performance could be weaker than expected.
- On September 30, WRIT issued $250 million of 4.95% unsecured notes due 2020, with $245.8 million net proceeds. After quarter-end it repurchased $122.8 million of 3.875% convertible notes and $56.1 million of 5.95% notes; the estimated extinguishment loss was $9.0 million. After these repurchases, remaining 2011 debt maturities were estimated at $209.9 million. Management expected to address them through some combination of new debt, property sales and equity issuance.
- Management identified risks including tenant financial health, leasing and occupancy, Washington-area economic conditions and federal spending, competition, interest rates, refinancing and access to capital. Credit-facility and unsecured-note covenants were being met at September 30; covenant failure could trigger default and accelerated repayment. The company also noted that higher or longer credit-line balances could increase exposure to rate changes.
- Severe first-quarter snow increased nine-month snow-removal costs. The filing reports no legal proceedings and no risk-factor changes in Part II. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether declining commercial occupancy—especially industrial and office—stabilizes, and whether lease renewals and leasing costs support reported rent growth.
- Liquidity and refinancing plans for the remaining 2011 maturities, including the post-quarter note repurchases and use of the remaining 2020-note proceeds.
- How much of NOI and FFO performance reflects recurring property operations versus acquisitions, dispositions, development lease-up and other non-core activity.
- Whether cash flow can sustain the dividend while funding property investment and potential acquisitions; FFO is a non-GAAP measure and is not cash available for distributions.
- Potential dilution from equity issuance and the effect of higher debt levels, interest rates and covenant limits on financial flexibility.