Business context and reporting period
Washington Real Estate Investment Trust (WRIT), now known as Elme Communities, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. It owned and operated properties in the greater Washington, D.C. region across office, medical office, retail, multifamily and industrial/flex categories. The industrial/flex segment was classified as discontinued operations following the agreed sale of the segment and two office properties.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Rental revenue, continuing operations | $71.9 | $65.0 | $212.8 | $193.1 |
| Real estate operating income / NOI | $20.5 / $47.9 | $19.8 / $43.1 | $62.2 / $141.7 | $57.5 / $127.5 |
| Income from continuing operations | $2.7 | $3.1 | $9.3 | $8.0 |
| Net income attributable to controlling interests | $63.0 | $6.6 | $74.2 | $26.8 |
| FFO, as defined by NAREIT | $30.8 | $30.9 | $93.8 | $90.4 |
| Basic earnings per share | $0.95 | $0.11 | $1.12 | $0.43 |
| Dividends declared and paid per share | $0.4338 | $0.4325 | $1.3014 | $1.2975 |
- Q3 continuing-operations NOI margin was approximately 66.5% of rental revenue, versus 66.3% a year earlier. Management attributed higher revenue and NOI mainly to acquisitions; same-store NOI was nearly flat, up 0.6% in Q3 and 0.6% for the nine-month period.
- Net income surged primarily because of a $56.6 million gain on the first phase of the property sale. Continuing-operations income declined in Q3, while Q3 FFO was essentially unchanged. FFO is a non-GAAP measure and is not equivalent to cash available for distributions.
- Nine-month operating cash flow was $86.4 million, versus $83.5 million. Investing activities used $23.2 million, compared with $61.8 million; financing activities used $101.2 million, versus $229.5 million provided in 2010. Cash and cash equivalents ended the period at $40.8 million, down from $78.8 million at year-end 2010.
- At September 30, total debt was $1.279 billion, compared with $1.215 billion at year-end 2010: $428.9 million of mortgage debt, $193.0 million drawn on credit facilities and $657.4 million of unsecured notes. Fixed-rate mortgages had a 5.9% effective weighted-average rate and 4.7-year weighted-average maturity.
- The two revolving facilities had $475 million of committed capacity and $193 million drawn; after letters of credit, $280.3 million was unused and available. The $75 million facility matures in June 2012; the $400 million facility matures in July 2014 and has a one-year extension option. WRIT reported compliance with debt covenants.
Material changes and operating developments
- WRIT agreed to sell its entire industrial segment and two office assets for $350 million. It closed sales for $235.8 million in September and recognized the $56.6 million gain. The remaining transactions closed after quarter-end: Northern Virginia Industrial Park II sold for $44.5 million on October 3; the final properties sold for $70.6 million on November 1. The filing also reports a $58.8 million April sale of Dulles Station, Phase I.
- During the nine months, WRIT acquired properties and development land with aggregate contract purchase prices of $371.6 million; cash acquisition costs were $281.7 million, primarily because of assumed mortgages and other settlement items. The acquisitions included office, retail and multifamily-development assets.
- Overall occupancy was 90.3%, down from 91.4% a year earlier. Office occupancy was 88.6%, medical office 87.2%, retail 92.3% and multifamily 94.0%. Management cited continued difficulty leasing vacant commercial space and attributed the challenging environment partly to federal budget uncertainty and broader economic concerns.
- For the nine months, new commercial leases covered 762,200 square feet at an average rental rate 9.5% above expiring leases. In Q3, 56.9% of expiring commercial space was renewed, versus 38.2% a year earlier.
- Retail same-store NOI declined 3.5% for the nine months, including higher expenses associated with a large tenant bankruptcy at Centre at Hagerstown. Multifamily occupancy also fell year over year.
Outlook, risks and unusual items
- No specific earnings or FFO guidance was provided. Management estimated 2011 capital needs of $35–$45 million for existing assets, about $1 million for first-generation tenant costs, $25–$30 million for development, and approximately $283.1 million net of assumed mortgages for known acquisitions, which had closed during the period.
- Management said operating cash flow is important to maintaining the dividend and warned that a significant decline could require borrowing to sustain the current rate or a dividend reduction. Dividend decisions remain subject to board discretion, cash availability, legal requirements and REIT distribution rules.
- Interest-rate exposure, refinancing, access to capital, tenant health, leasing conditions, competing supply, regional economic conditions and changes in federal spending were identified as factors that could affect results. WRIT noted that greater or longer-term reliance on variable-rate credit facilities could make earnings more sensitive to adverse interest-rate movements.
- After quarter-end, WRIT prepaid $17.9 million of Dulles Business Park mortgage debt, incurring about $1.0 million in penalties; an $875,000 sale-price increase partially offset the cost. The filing reports a $599,000 impairment charge on Dulles Station, Phase I in the nine-month period and a $1.1 million income-tax expense related to property sales.
- Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported. The filing reported no legal proceedings or separate new risk factors.
Important facts for investors to verify
- Reconcile reported net income and EPS to recurring operating performance, particularly the $56.6 million disposal gain; assess FFO and same-store NOI separately.
- Confirm the completed sale proceeds, use of proceeds, post-quarter transactions and effect of divesting the industrial segment and two office assets on future revenue and NOI.
- Review debt maturities, facility availability, covenant headroom, variable-rate exposure and the cash impact of debt prepayments and penalties.
- Monitor occupancy, leasing and renewal trends by segment, including office and multifamily softness and the retail tenant bankruptcy exposure.
- Assess dividend sustainability against operating cash flow, investment and development requirements, and the REIT distribution obligation.