Elme Communities quarterly report, Q2 FY2012

Business context and reporting period

This is Washington Real Estate Investment Trust’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The filing identifies the registrant as WRIT, not Elme Communities. WRIT owned 72 properties in the greater Washington, D.C. region: office, medical office, retail and multifamily assets.

Financial performance and condition

• Q2 revenue and NOI each rose 7.1%; however, same-store NOI fell 1.7%. NOI margin was approximately 66.8% in both quarters.
• Q2 net income per share was $0.09 versus $0.10; FFO declined 4.7%. Six-month net income was broadly flat, while FFO fell 1.4%.
• Six-month investing cash outflow was $76.3m, including $52.1m for acquisitions and $21.5m for property improvements. Financing provided $10.8m. Cash and cash equivalents were $14.4m at June 30.
• Total debt was $1.254bn, up from $1.184bn at year-end 2011. Debt included $425.3m of mortgages, $221.0m drawn on credit facilities and $607.7m of notes payable. Credit facilities had $278.2m of remaining capacity. WRIT reported compliance with debt covenants.
• Total assets were $2.154bn and total liabilities $1.333bn. Fixed-rate mortgage debt had a 5.9% effective weighted-average rate and 4.1-year weighted-average maturity.

Material changes and operating trends

• Revenue growth reflected acquisitions, including the June purchase of Fairgate at Ballston, a 147,000-square-foot office property acquired for $52.25m. Same-store occupancy and NOI weakened, especially in office and medical office.
• Overall occupancy was 89.3%, down from 90.5% a year earlier. Office occupancy declined to 85.8% from 88.2%; medical office to 86.4% from 87.3%; multifamily to 94.8% from 95.6%. Retail improved to 93.3% from 92.0%.
• Interest expense declined 7.9% in Q2, while depreciation and amortization increased 13.6%. Prior-year discontinued operations contributed $3.3m of Q2 income and $5.9m for the first half; none was reported in 2012.
• WRIT repaid $50m of 5.05% notes at maturity in May using its credit lines. It amended both credit facilities, extending maturities to 2015 and 2016, respectively, and setting borrowing margins at LIBOR plus 107.5 basis points. It also prepaid $21.4m of mortgage debt on August 1, after quarter-end.

Outlook, risks and unusual items

• Management expected challenging Washington-area leasing conditions through the remainder of 2012, citing federal budget uncertainty and broader economic concerns. It reported continued difficulty leasing vacant office space.
• For the rest of 2012, WRIT estimated $45m–$60m of investment in existing operating properties, including $20m–$25m for tenant-related costs and leasing commissions, plus approximately $12.9m for development projects.
• On July 26, the board announced a quarterly dividend of $0.30 per share, a 31% reduction from the Q2 rate of $0.43375. The filing cautions that dividends depend on operating cash flow, leasing, capital needs and other factors.
• Key stated risks include federal spending changes, regional economic and tenant conditions, leasing and occupancy, capital availability and cost, interest-rate changes, competition, and debt covenant compliance. The company warned that covenant breaches could accelerate repayment and harm liquidity. It also noted greater reliance on variable-rate credit lines could increase exposure to rate rises.
• WRIT disclosed immaterial prior-period income-statement reclassifications between real estate operating income and other income/expense; they did not affect net income, cash flows or other operating measures. No properties were held for sale at June 30.

Important facts for investors to verify

• Confirm the entity and reporting-period match: this filing is for Washington Real Estate Investment Trust, quarter ended June 30, 2012.
• Assess whether same-store leasing, occupancy and NOI trends—particularly in office and medical office—improved after the reporting date.
• Evaluate debt maturities, credit-line utilization, variable-rate exposure and covenant headroom alongside the reported $278.2m of available facility capacity.
• Review the dividend reduction against recurring capital and leasing requirements, operating cash flow and FFO; FFO is a non-GAAP measure and is not cash available for distributions.
• Track Fairgate integration and the cost, financing and delivery progress of the two multifamily development projects.