Business context and reporting period
The supplied filing is Washington Real Estate Investment Trust’s (Washington REIT, ticker WRE) Form 10-K for the fiscal year ended December 31, 2018, filed February 19, 2019. It is not filed under the name Elme Communities; verify that this historical filing is the intended issuer and period. Washington REIT owned and operated office, multifamily and retail properties concentrated in the greater Washington, D.C. region. At year-end it reported 48 properties, approximately 6.1 million square feet of commercial space and 4,268 residential units.
Key financial and operating metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Real estate rental revenue | $336.9 million | $325.1 million | +3.6% |
| Net income attributable to controlling interests | $25.6 million | $19.7 million | +30.3% |
| Diluted EPS | $0.32 | $0.25 | +$0.07 |
| Net operating income (NOI, non-GAAP) | $220.7 million | $209.4 million | +5.4% |
| NAREIT FFO (non-GAAP) | $146.2 million | $141.0 million | +3.7% |
| Cash from operating activities | $147.4 million | $130.6 million | +$16.7 million |
| Dividends declared per share | $1.20 | $1.20 | No change |
Fourth-quarter 2018 revenue was $82.9 million, net income was $5.7 million and diluted EPS was $0.07. Same-store NOI rose 3.1%; same-store rental revenue increased 2.9%. Real estate expenses were 34.5% of revenue, compared with 35.6% in 2017. Year-end total assets were $2.42 billion and shareholders’ equity was $1.07 billion.
At December 31, 2018, debt comprised $995.4 million of notes payable, $59.8 million of mortgage debt and $188.0 million drawn on the credit facility, or $1.243 billion in total. The filing reports $512 million of unused revolving capacity at year-end; management separately reported $496 million available as of February 14, 2019. Cash and cash equivalents were $6.0 million, plus $1.6 million restricted cash. Weighted-average debt maturity was 3.7 years; there were no scheduled debt maturities in 2019. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- NOI growth reflected $20.0 million of acquisition-related NOI and a $5.6 million increase in same-store NOI, partly offset by $14.4 million of lost income from disposed properties.
- Net income improved chiefly because impairment charges declined by $31.3 million and NOI increased by $11.2 million. Offsets included $22.4 million lower gains on property sales, $9.2 million higher depreciation and amortization, and $3.6 million higher interest expense.
- Interest expense rose 7.6% to $51.1 million. Average credit-facility borrowings and rates increased; the facility’s reported year-end borrowing rate was LIBOR plus 1.0%.
- Operating cash flow increased, while investing cash outflow narrowed to $38.9 million from $196.4 million, mainly due to greater property-sale proceeds and lower acquisition spending. Financing activities used $113.4 million, versus providing $60.7 million in 2017, including lower equity issuance proceeds and debt repayments.
- The company acquired Arlington Tower for a $250 million contract price and sold Braddock Metro Center and 2445 M Street for combined contract proceeds of $194.6 million. The latter sale generated a $2.5 million gain; Braddock generated no gain after prior impairment.
Outlook, commentary, risks and unusual items
Management expected 2019 capital needs to include $80–$85 million for the operating portfolio, including tenant-related costs and leasing commissions; $65–$70 million for development and redevelopment; and funding for dividends and potential acquisitions. Expected total tenant-related capital improvements were approximately $36.6 million. Management believed operating cash flow, potential asset sales and access to capital would be sufficient, but warned that requirements could differ materially and financing or cash generation could prove inadequate.
Projects included the Trove multifamily development, predevelopment for a multifamily project adjacent to Riverside Apartments, and the substantially completed Spring Valley Village redevelopment. The filing provided no specific 2019 earnings or FFO guidance. The regional market outlook was mixed: 2018 Washington-area job growth was strong, but office supply could pressure occupancy and rents, while forecast apartment deliveries could weigh on multifamily occupancy and rent growth. Management also highlighted approximately one quarter of office gross annual rent scheduled to expire in 2019–2020, with Arlington Tower and Watergate 600 representing significant portions.
Key risks include geographic concentration in the Washington region and exposure to government spending and professional/business services; lease rollover, tenant retention and re-leasing costs; competition and new supply; retail e-commerce; development execution and cost risks; rising rates, refinancing and covenant risk; and property, environmental, cyber, weather and insurance exposures. The company used interest-rate swaps to fix rates on term loans, but its hedges referenced LIBOR, whose future availability after 2021 was uncertain. Other notable items: the 2018 refinancing generated a $1.2 million non-cash debt-extinguishment loss; the company estimated adoption of the new lease standard could reduce annual earnings by $1.0–$1.5 million due to leasing costs no longer qualifying for capitalization. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. No material legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm issuer identity and continuity: the filing is for Washington REIT, not under the Elme Communities name.
- Reconcile reported available credit: $512 million at December 31, 2018 versus $496 million as of February 14, 2019.
- Review office lease expirations, especially Arlington Tower and Watergate 600, and subsequent leasing progress, retention, concessions and tenant-improvement costs.
- Assess whether 2019 development, redevelopment and recurring capital spending can be funded while sustaining the $1.20 annual dividend per share.
- Monitor debt maturities, interest-rate exposure, LIBOR transition and covenant headroom; year-end debt was $1.243 billion and weighted-average maturity was 3.7 years.
- Evaluate the assumptions behind non-GAAP NOI and FFO, property impairments and sale gains, and the effect of lease-accounting adoption on reported earnings.