Business context and reporting period
This is Washington Real Estate Investment Trust’s Form 10-K for the fiscal year ended December 31, 2014, filed March 2, 2015. The filing identifies the registrant as Washington REIT, not Elme Communities; investors should verify the relationship between the requested company name and this filing. Washington REIT owned 56 properties in the greater Washington, D.C. region: 25 office, 17 retail and 14 multifamily properties, with 3,053 residential units. It completed the sale of its medical office portfolio in early 2014.
Key financial and operating metrics
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Real estate rental revenue | $288.6 million | $263.0 million | Up 9.7% |
| Net operating income (NOI) | $184.9 million | $169.7 million | Up 9.0%; same-store NOI rose 5.3% |
| Net income attributable to controlling interests | $111.6 million | $37.3 million | Includes $106.0 million gain on sale of real estate |
| Continuing-operations income (loss) | $5.1 million | $(0.2) million | Improved modestly |
| Diluted EPS | $1.67 | $0.55 | Gain-driven; continuing-operations EPS was $0.08 |
| Funds from operations (FFO) | $101.1 million | $113.1 million | Down $12.0 million, chiefly from medical-office dispositions |
| Cash from operating activities | $80.7 million | $113.3 million | Down $32.6 million |
| Cash and cash equivalents at year-end | $15.8 million | $130.3 million | Substantial decrease |
| Total debt at year-end | $1.216 billion | $1.141 billion | Debt increased about $74 million |
| Common dividend | $1.20 per share | $1.20 per share | $0.30 quarterly |
Year-end occupancy was 90.5%, compared with 88.8% in 2013. The filing reports 2014 NOI margin of approximately 64.1% of rental revenue; this is a derived ratio, not a GAAP margin. Total assets were $2.114 billion and shareholders’ equity was $819.6 million.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions, higher same-store occupancy and rental rates, and lower doubtful-account provisions. Same-store NOI increased $8.6 million, with higher occupancy and lower bad-debt provisions partly offset by higher property taxes and operating costs.
- Net income rose sharply mainly because the medical-office portfolio sale generated a $106.0 million gain in 2014, versus $22.1 million in 2013. FFO and operating cash flow declined as income from disposed properties was lost.
- Washington REIT acquired four properties in 2014 for aggregate contract prices of $297.0 million: two office buildings, one retail center and one multifamily property. It issued 1.125 million shares for $30.7 million net proceeds.
- Debt rose, including assumed mortgages associated with acquisitions. The company repaid $100 million of 5.25% unsecured notes at maturity in January 2014.
Outlook, management commentary, risks and unusual items
- Management expected sufficient operating cash flow and capital-market access for 2015 needs, while cautioning that funding could be constrained by market conditions, leasing performance, interest rates or share-price weakness.
- Expected 2015 requirements included $150 million to repay or refinance 5.35% notes maturing in May; approximately $65–70 million for the operating portfolio; $15–20 million for development and redevelopment; and dividends. As of February 24, 2015, cash was approximately $34 million and available unsecured credit capacity was $434.5 million.
- The Silverline Center office renovation was expected to finish in first-quarter 2015, leaving approximately 200,000 square feet to lease. Management anticipated leasing challenges and possible downward pressure on same-store NOI. The Maxwell construction was substantially complete, with remaining floors becoming available in first-quarter 2015.
- Construction at the proposed 1225 First Street multifamily project remained delayed because of market conditions and oversupply concerns. The filing also cited expected growth in Washington-area apartment deliveries and possible higher vacancy and lower rents in 2015.
- Major risks include concentration in the Washington region and exposure to federal spending and professional/business-services employment; lease renewal and tenant improvement costs; development, refinancing and interest-rate risks; and environmental, weather, terrorism, cyber-security and regulatory risks. No single tenant represented more than 5% of rental revenue, and federal government tenants collectively represented less than 1% in 2014.
- The filing reported no material legal proceedings. Management and the auditor concluded that internal control over financial reporting was effective; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Confirm the issuer identity and the connection, if any, between Washington REIT and Elme Communities.
- Review the $106.0 million disposal gain and distinguish it from recurring earnings; compare FFO and operating cash flow with the continuing portfolio.
- Verify refinancing or repayment of the $150 million notes due May 2015 and subsequent liquidity, debt maturities and covenant headroom.
- Track leasing progress and occupancy at Silverline Center, tenant-related capital spending, and the completion and lease-up of The Maxwell.
- Assess whether the $1.20 annual dividend remains supported by recurring cash flow after capital improvements, leasing costs and debt service.
- Review the February 2015 agreement to sell Country Club Towers for $37.8 million and the expected use of proceeds.