Business context and reporting period
Washington Real Estate Investment Trust (the registrant identified in this filing; the request metadata names Elme Communities) filed this Form 10-K for the fiscal year ended December 31, 2016. It owned and operated office, multifamily and retail properties concentrated in the greater Washington, D.C. region. At year-end, the portfolio comprised 49 properties, approximately 6.0 million square feet of commercial space and 4,480 residential units. This is an annual report, not a standalone fourth-quarter filing.
Financial and operating metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Real estate rental revenue | $313.3 million | $306.4 million | +2.2% |
| Net income attributable to controlling interests | $119.3 million | $89.7 million | +$29.6 million |
| Diluted earnings per share | $1.65 | $1.31 | +$0.34 |
| Net operating income (NOI) | $198.3 million | $194.2 million | +2.1% |
| NAREIT funds from operations (FFO) | $126.0 million | $108.5 million | +16.2% |
| Cash provided by operating activities | $116.9 million | $109.4 million | +$7.5 million |
NOI was approximately 63.3% of rental revenue, versus 63.4% in 2015. The company cautions that NOI and FFO are non-GAAP measures and are not substitutes for net income or operating cash flow.
- Same-store rental revenue increased 1.7%, while same-store NOI rose 1.2%; portfolio occupancy was 93.5%, compared with 90.2% a year earlier.
- Year-end assets were $2.254 billion and total equity was $1.052 billion. Debt was $1.112 billion: $843.1 million unsecured notes, $148.5 million mortgages and $120.0 million revolving credit borrowings.
- Cash and cash equivalents were $11.3 million at year-end; restricted cash was $6.3 million. Revolving-credit availability was $480 million at year-end and approximately $478 million on February 16, 2017.
- Cash dividends declared were $1.20 per share for 2016, unchanged from 2015. The quarterly dividend rate was $0.30 per share.
Material changes versus the prior comparable period
- Net income increased largely because of $101.7 million in 2016 real-estate sale gains, compared with $91.1 million in 2015. Gains are not a recurring measure of property operations.
- FFO increased primarily because of lower interest expense, higher NOI and the absence of the $5.9 million 2015 real-estate impairment charge.
- Interest expense declined $6.4 million to $53.1 million, mainly following repayment of several mortgages. Debt balances fell by approximately $154.6 million year over year.
- The company sold six Maryland office properties and Dulles Station, Phase II, for total 2016 contract prices of $252.1 million, recognizing $101.7 million in gains. It acquired Riverside Apartments, a 1,222-unit multifamily property, for a contract price of $244.8 million.
- A May 2016 equity offering of approximately 5.3 million shares generated net proceeds of $143.4 million; ATM sales generated a further $29.6 million. Shares outstanding rose from 68.2 million to 74.6 million.
- Operating cash flow rose, but cash declined $12.5 million during the year, reflecting net financing outflows and investment activity.
Outlook, commentary, risks and unusual items
- Management expected steady-to-improved performance across segments in 2017, citing anticipated regional job growth. This was an expectation, not quantified earnings guidance.
- Management estimated 2017 spending of $70–$75 million on the operating portfolio, including $35–$40 million for tenant-related capital and leasing commissions, and $45–$50 million for development and redevelopment. It also expected approximately $25 million in total tenant-related capital improvements.
- 2017 contractual capital needs included dividends and a scheduled $49.6 million mortgage maturity; the Army Navy Building mortgage was prepaid at par in February 2017 using term-loan proceeds. Management reported no other 2017 debt maturities.
- The company anticipated 2017 regional apartment deliveries of approximately 17,200 units, which could pressure occupancy and rent growth. Office vacancy in the region remained elevated at 16.1%, and expected supply was also a concern.
- Key risks include concentration in one metropolitan area; regional exposure to federal spending and professional/business services; leasing, tenant-credit and renewal risks; development execution; debt refinancing and interest-rate exposure; property operating costs; and the ability to maintain distributions. Although direct federal-government tenants represented less than 1% of rental revenue, the filing notes broader indirect exposure through contractors and the regional economy.
- 2016 included a $0.7 million casualty gain related to a prior fire and a $0.6 million income-tax benefit. The filing reported no material legal proceedings, no unresolved SEC staff comments and no material off-balance-sheet arrangements. Management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Separate recurring property performance from disposition gains: confirm the sustainability of same-store NOI growth and the reported FFO improvement.
- Review the impact of the Maryland office sales, the Riverside acquisition and the share issuance on future revenue, earnings per share and portfolio mix.
- Assess leasing and renewal exposure, including office expirations, major-tenant lease continuity and apartment supply in the region.
- Verify the funding plan for 2017 capital spending and dividends, remaining credit availability, covenant headroom and debt refinancing requirements.
- Compare management’s 2017 outlook and projected development spending with subsequent leasing, construction and operating results.