Business context and reporting period
The filing is Washington Real Estate Investment Trust’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Although the request identifies Elme Communities, the filing itself is for Washington Real Estate Investment Trust (WashREIT); verify the issuer before attributing these results to another company. WashREIT owned 53 properties in the greater Washington, D.C. region, including office, multifamily and retail assets. Its strategy was shifting away from retail and toward multifamily.
Financial results and position
- Second-quarter revenue and earnings: Real estate rental revenue was $76.8 million, up 2.0% year over year. Net income attributable to controlling interests was $1.0 million, versus $10.8 million; continuing operations recorded a $6.2 million loss, while discontinued operations contributed $7.2 million of income.
- Operating performance: NOI, a non-GAAP measure, was $48.7 million, up 0.5%; its ratio to rental revenue was approximately 63.4%, versus 64.3% a year earlier. NAREIT FFO was $37.5 million, down 1.8%. Same-store NOI declined 0.6%. Same-store ending occupancy fell to 93.3% from 94.7%; total continuing-operations occupancy was 93.2%, versus 93.7%.
- Six-month results: Rental revenue was $148.3 million versus $149.0 million. Net loss was $3.4 million versus net income of $14.0 million; NAREIT FFO was $71.0 million versus $73.3 million. NOI declined 1.1% to $94.0 million.
- Cash flow: For the six months, operating cash flow was $60.5 million, down from $70.7 million. Investing used $467.2 million, mainly reflecting the multifamily acquisition; financing provided $406.4 million. Cash, cash equivalents and restricted cash totaled $7.4 million at period-end.
- Debt and liquidity: At June 30, notes payable were $1.445 billion, mortgage notes payable $47.6 million and revolver borrowings $218.0 million. The $700 million revolver had $482 million unused and available. Total equity was $1.011 billion. A $450 million term loan was due October 30, 2019, with a six-month extension option; after quarter-end, $350 million was repaid using retail-sale proceeds. The filing reports covenant compliance at June 30.
- Dividends: Dividends declared were $0.30 per share for the quarter and $0.60 per share for the six months.
Material changes versus the prior comparable period
- WashREIT acquired the seven-property Assembly multifamily portfolio, comprising 2,113 units, for a contract price of $461.2 million. The acquisition added $5.5 million of rental revenue in the first half, but increased depreciation and financing costs.
- Eight retail properties were classified as held for sale and discontinued operations, reflecting a strategic shift and a move from three reportable segments to office and multifamily. The five-property Shopping Center Portfolio sale closed July 23, 2019; the planned Power Center Portfolio sale was revised, and the filing states that completion of proposed power-center sales was not assured.
- Second-quarter net income fell mainly because depreciation and amortization rose $5.5 million, interest expense rose $2.1 million, and the prior-year quarter included a $2.5 million property-sale gain whereas 2019 included a $1.0 million sale loss. Six-month results also included an $8.4 million impairment charge on Quantico Corporate Center.
- Same-store multifamily rental revenue increased, but office occupancy and rental revenue weakened. Same-store office expenses increased, including higher real estate taxes.
Outlook, commentary and risks
- Management estimated 2019 capital requirements of $80–$85 million for the existing portfolio, including $22.5–$27.5 million for tenant-related capital and leasing commissions, plus $47.5–$52.5 million for development and redevelopment. Potential acquisitions were expected to be offset in part by property-sale proceeds. No earnings or FFO guidance is provided in the supplied filing text.
- Management described retail dispositions and multifamily acquisitions as a strategic portfolio shift intended to simplify reporting and reduce exposure to future retail lease expirations. A further 277-unit multifamily acquisition, Cascade at Landmark, closed July 23 for $69.8 million.
- Key risks include refinancing and interest-rate exposure, the short-term $450 million loan maturity, execution and timing of planned property sales, occupancy and leasing performance, Washington-region economic conditions, tenant credit, and real-estate impairment risk. Management cautioned that proposed power-center sales might not be completed. It also noted that future changes in expected holding periods or cash flows could require additional impairment charges.
- WashREIT adopted the new lease-accounting standard on January 1, 2019, recording a $0.9 million cumulative adjustment to opening equity. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Confirm the issuer: this filing names Washington Real Estate Investment Trust, not Elme Communities.
- Check subsequent closing, proceeds and debt repayment for the retail dispositions, including the revised scope and status of the remaining power-center sales.
- Assess refinancing or extension plans for the $450 million term loan due October 2019 and reconcile that maturity with management’s statement that there were no debt maturities in 2019.
- Review office leasing, occupancy and same-store NOI trends, alongside the cost and expected returns of the multifamily acquisitions and development pipeline.
- Track cash available for dividends and the stated capital program; the filing notes that a significant decline in operating cash flow could require a dividend reduction.