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, 2017. Although the request identifies Elme Communities, the filing names the registrant as Washington Real Estate Investment Trust. The company owned 50 properties in the greater Washington, D.C. region: 20 office properties, 16 retail centers and 14 multifamily properties, totaling approximately 6.3 million commercial square feet and 4,480 apartment units.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Rental revenue | $83.5 million | $79.4 million | $161.0 million | $156.5 million |
| Net income attributable to controlling interests | $7.9 million | $31.8 million | $14.5 million | $34.2 million |
| Diluted earnings per share | $0.10 | $0.44 | $0.19 | $0.49 |
| NOI | $54.8 million | $51.2 million | $104.4 million | $99.6 million |
| NAREIT FFO | $37.1 million | $32.9 million | $69.8 million | $61.3 million |
| Cash provided by operating activities | Not presented by quarter in the supplied filing text | $65.4 million | $61.3 million |
Real estate expenses were 34.4% of revenue in Q2, versus 35.5% a year earlier; for the first half, the ratio was 35.1%, versus 36.4%. The filing reports cash of $13.2 million and restricted cash of $1.5 million at June 30. Total debt was $1.219 billion, compared with $1.112 billion at December 31, 2016. The $600 million revolving facility had $228 million drawn and $372 million unused and available at June 30. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Q2 rental revenue rose 5.1%, and NOI increased 6.9%. Same-store NOI grew 8.8% in Q2 and 9.6% for the first half; same-store ending occupancy was 93.3%, up from 90.8% a year earlier.
- Q2 net income fell 75.3%, principally because Q2 2016 included a $24.1 million property-sale gain and a $0.7 million casualty gain. Higher depreciation and amortization also weighed on 2017 earnings. First-half net income declined 57.7% for similar reasons.
- FFO increased 12.9% in Q2 and 13.9% for the first half. Lower interest expense and higher NOI contributed; FFO is a non-GAAP measure and is not equivalent to cash available for distributions.
- The company acquired Watergate 600, a 289,000-square-foot office building, for a $135 million contract price in April 2017. It also prepaid the remaining $49.6 million mortgage on the Army Navy Building and drew the final $50 million of its seven-year term loan.
- First-half operating cash flow increased 6.7%. Investing cash outflow was $166.9 million, including $138.4 million of real estate acquisitions; financing cash inflow was $103.5 million, including $63.9 million net equity proceeds and increased revolving-credit borrowings.
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings or FFO guidance. For full-year 2017, management estimated $80–$85 million of investment in existing properties, including $35–$40 million for tenant-related capital and leasing commissions, and $30–$35 million for development and redevelopment. It also anticipated funding dividends and potential acquisitions, offset by any disposition proceeds.
- The quarterly dividend was $0.30 per share; management stated that continuation depends on operating results, cash availability, REIT distribution requirements and board review. The filing cautions that a significant decline in operating cash flow could require a dividend reduction.
- Development and redevelopment activity included the Trove, land adjacent to Riverside Apartments, the Army Navy Building, and Spring Valley Village. The company expected to place remaining Army Navy Building upgrades into service during the rest of 2017.
- A sale agreement for Walker House was signed during Q2, with closing expected in 2017; the filing cautions that closing is not assured.
- Interest-rate risk, tenant economic health, Washington-region conditions, capital availability, competing supply, federal spending, property risks and REIT qualification are among the disclosed risk factors. $300 million of term loans were hedged at fixed rates of 2.7% and 2.9%; the filing estimated $0.2 million of hedge losses would be reclassified to interest expense over the next 12 months.
- The company reported no legal proceedings, no new risk factors in this 10-Q, no material off-balance-sheet arrangements, and effective disclosure controls. Management identified no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the issuer and period: the supplied filing is Washington Real Estate Investment Trust’s 2017 second-quarter report, notwithstanding the Elme Communities request label.
- Review recurring operating performance separately from prior-year property-sale and casualty gains; compare same-store NOI, occupancy and leasing costs with reported net income and FFO.
- Assess leverage and liquidity, including the $1.219 billion total debt, revolver availability, debt maturities, covenants and interest-rate hedges.
- Track funding needs for tenant improvements, leasing commissions, development projects and dividends against operating cash flow and potential asset-sale proceeds.
- Monitor the Walker House sale, project execution, regional market and tenant conditions, and the board’s future dividend decisions.