Elme Communities quarterly report, Q2 FY2018

Business context and reporting period

Unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing identifies the registrant as Washington Real Estate Investment Trust; the request metadata names Elme Communities, so confirm the entity and historical filing are the intended match. The company owned 48 properties in the greater Washington, D.C. region: 19 office properties, 16 retail centers and 13 multifamily properties, plus development land.

Key financial metrics

Amounts are in millions of dollars except per-share data and where noted.

Q2 NOI margin was approximately 65.9% of rental revenue, versus 65.6% a year earlier; the filing reports real estate expenses at 34.1% of revenue versus 34.4%. For the first half, those expense ratios were 34.6% and 35.1%, respectively. Dividends declared were $0.30 per share for Q2 and $0.60 for the half-year, unchanged from 2017.

At June 30, total debt was $1.259 billion, compared with $1.158 billion at year-end 2017. Cash and restricted cash totaled $8.3 million; $531 million of the $700 million revolving facility was unused and available. Total assets were $2.409 billion and total equity was $1.073 billion.

Material changes versus prior comparable periods

• Q2 rental revenue increased 3.8%, NOI increased 4.3%, and controlling-interest net income increased 36.7%. The income increase reflected a $2.5 million property-sale gain and higher NOI, partly offset by higher interest and depreciation expense.
• First-half rental revenue rose 6.5% and NOI rose 7.4%, while controlling-interest net income fell 3.1%. Higher interest expense, a $1.9 million impairment and a $1.2 million debt-extinguishment loss more than offset operating growth and the sale gain.
• Same-store rental revenue increased 2.6% in both the quarter and half-year. Same-store ending occupancy was 93.3% at June 30, up from 92.7% a year earlier; total portfolio occupancy was 93.4% in both periods.
• The company acquired Arlington Tower, a 396,000-square-foot office property, for a contract price of $250 million. It sold Braddock Metro Center for $93 million and 2445 M Street for $101.6 million; the latter generated a $2.5 million gain.
• First-half investing cash flow was positive $34.6 million, versus negative $171.5 million in 2017, chiefly reflecting property-sale proceeds. Financing cash flow was negative $109.7 million, versus positive $103.5 million, including dividends, debt repayments and refinancing activity.

Outlook, commentary and risks

• No earnings or operating guidance is provided. Management’s stated strategy is to recycle assets with limited growth potential and invest in acquisitions and redevelopment opportunities in the Washington region.
• Estimated 2018 capital needs included $80–$90 million for existing operating assets, $40–$45 million for development and redevelopment, and repayment or refinancing of a $31.7 million mortgage. Management expected to prepay that mortgage in Q3 2018 without penalty.
• The company amended and extended its credit facilities: the revolving facility now runs to March 2022, with two six-month extension options, and a $250 million term loan matures in July 2023. Interest-rate swaps fixed the term-loan rates on $150 million at 2.31% and $100 million at 3.71%. The company reported compliance with debt covenants.
• Management declared quarterly dividends at $0.30 per share but noted that maintaining the dividend depends on results, cash availability and board review. The filing identifies interest rates, capital availability, tenant health, leasing conditions, regional economic conditions, federal spending and REIT qualification among key risks.
• There were no reported legal proceedings, material changes to previously disclosed risk factors, or material off-balance-sheet arrangements. Management concluded disclosure controls were effective.

Important facts for investors to verify

• Confirm the registrant identity and that this 2018 Washington REIT filing is the intended filing for the Elme Communities request.
• Assess whether same-store growth and occupancy trends offset weaker performance in sold assets and higher financing costs.
• Review the company’s debt maturity schedule, variable-rate exposure, swap terms, covenant headroom and planned mortgage repayment.
• Evaluate whether operating cash flow and future capital needs support the $0.30 quarterly dividend; FFO is a supplemental non-GAAP measure, not cash available for distributions.
• Review execution, leasing and funding risks for Arlington Tower and the disclosed development and redevelopment projects.