Business context and reporting period
This is Washington Real Estate Investment Trust’s unaudited Form 10-Q for the quarter ended March 31, 2014. The filing identifies the registrant as Washington REIT, not Elme Communities. Its business was owning and operating office, retail, and multifamily properties in the greater Washington, D.C. area. At quarter-end it reported 53 properties, approximately 7.1 million square feet of commercial space, and 2,540 multifamily units.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Rental revenue | $68.6 million | $64.6 million |
| Net operating income (NOI) | $42.3 million | $42.0 million |
| Net income | $104.6 million | $7.3 million |
| Funds from operations (FFO) | $21.0 million | $29.7 million |
| Cash from operating activities | $22.5 million | $36.9 million |
- Net income included a $106.3 million gain on property sales; continuing operations recorded a $2.3 million loss, or $0.04 per share. Net income per share was $1.56, compared with $0.11 a year earlier.
- Rental revenue rose 6.3%, while NOI increased 0.6%. Same-store NOI declined 0.4%; same-store occupancy improved to 90.2% from 89.5%.
- Real estate expenses increased 16.8% to $26.3 million, reflecting severe-winter utilities and snow removal, higher taxes, and acquisitions. NOI as a share of rental revenue was approximately 61.6%, versus 65.1% a year earlier.
- Interest expense fell 10.3% to $14.5 million, mainly after repayment of $100 million of unsecured notes. Acquisition costs rose to $3.0 million from $0.2 million.
- Quarter-end cash was $62.1 million and restricted cash was $107.0 million, largely associated with tax-deferred exchanges. Total debt was $1.151 billion: $746.8 million of notes payable and $404.4 million of mortgage debt. The company had no revolver borrowings and $500 million of committed capacity available; it reported compliance with debt covenants.
- Operating cash flow declined 39.0% to $22.5 million. Investing activities provided $27.6 million, chiefly reflecting sale proceeds, while financing used $118.4 million, including the $100 million note repayment. The quarterly dividend was $0.30 per share.
Material changes, outlook, and risks
- The company completed the sale of its Medical Office Portfolio in January 2014, including the final transactions for $193.6 million and a $106.3 million gain. Earlier portfolio transactions had closed in 2013.
- It acquired Yale West, a 216-unit multifamily property, for $73 million and The Army Navy Club Building, an office property, for $79 million. The acquisitions included assumed mortgages totaling approximately $100.9 million.
- After quarter-end, on May 1, the company acquired 1775 Eye Street, a Washington, D.C. office building, for $104.5 million.
- Management estimated 2014 investment needs of $70–$75 million for existing properties, including $38–$42 million for tenant-related costs, and $50–$55 million for development and redevelopment. It also anticipated possible further acquisitions, partly offset by disposition proceeds. No earnings or FFO guidance was provided.
- Projects include the 7900 Westpark Drive redevelopment, with expected total investment of $35 million, and the 650 North Glebe multifamily development, then expected to complete in Q4 2014. Construction at 1225 First Street remained delayed as management reassessed market conditions and oversupply concerns.
- Disclosed risks include capital availability and cost, interest rates, tenant and regional economic conditions, federal spending changes, competing supply, and regulatory matters. Management noted that greater use of revolving facilities could expose earnings to adverse interest-rate movements. The filing reported effective disclosure controls and no material legal proceedings.
- The company early adopted a new accounting standard on discontinued operations in Q1 2014, changing the disposal-reporting criteria. Results and comparisons should be interpreted in light of the portfolio sales and the resulting discontinued-operations presentation.
Important facts for investors to verify
- Confirm the registrant identity: this supplied filing is for Washington REIT, although the request names Elme Communities.
- Separate recurring property performance from the $106.3 million sale gain; review continuing-operations results and FFO alongside GAAP net income.
- Assess the effect of dispositions, acquisitions, redevelopment, and lower reported operating cash flow on comparable performance and dividend coverage.
- Review the debt maturity schedule, assumed mortgage terms, covenant headroom, and availability of the $500 million credit facilities.
- Check the use and release timing of restricted exchange proceeds, planned capital spending, and subsequent acquisition funding.