ELME COMMUNITIES The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission ("SEC") onFebruary 18, 2022 . We refer to the three months endedJune 30, 2022 andJune 30, 2021 as the "2022 Quarter" and the "2021 Quarter," respectively, and the six months endedJune 30, 2022 andJune 30, 2021 as the "2022 Period" and "2021 Period," respectively.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to: risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of residential properties in the Southeastern markets, on the terms anticipated, or at all, and to realize any anticipated benefits, including the performance of any acquired residential properties at the levels anticipated; the risks associated with ownership of real estate in general and our real estate assets in particular; the economic health of the areas in which our properties are located, particularly with respect to greaterWashington, DC metro region and the larger Southeastern region; the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated; changes in the composition of our portfolio; fluctuations in interest rates and other risks related to changes in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers; the economic health of our residents; the ultimate duration of the COVID-19 global pandemic, including any mutations thereof, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, the effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and efficacy of the vaccines against emerging variants of COVID-19; the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts; compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities; the risks related to not having adequate insurance to cover potential losses; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced; the availability and terms of financing and capital and the general volatility of securities markets; the risks related to our organizational structure and limitations of stock ownership; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; whether our estimated transformation costs for 2022 will be correct; whether we will realize significant operation benefits from our operating model redesign on the timing contemplated or at all; and other risks and uncertainties detailed from time to time in our filings with theSEC , including our 2021 Form 10-K filed onFebruary 18, 2022 . While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
General
Introductory Matters
We provide our Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") in addition to the accompanying consolidated
financial statements and notes to assist readers in understanding our results of
operations and financial condition. We organize the MD&A as follows:
•Overview. Discussion of our business outlook, operating results, investment and
financing activity and capital requirements to provide context for the remainder
of MD&A.
•Results of Operations. Discussion of our financial results comparing the 2022
Quarter to the 2021 Quarter and the 2022 Period to the 2021 Period.
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•Liquidity and Capital Resources. Discussion of our financial condition and
analysis of changes in our capital structure and cash flows.
•Funds From Operations. Calculation of National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") Funds From Operations ("NAREIT FFO"), a
non-GAAP supplemental measure to net income.
•Critical Accounting Estimates. Descriptions of accounting policies that reflect
significant judgments and estimates used in the preparation of our consolidated
financial statements.
When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators:
•Net operating income ("NOI"), calculated as set forth below under the caption
"Results of Operations - Net Operating Income." NOI is a non-GAAP supplemental
measure to net income.
•NAREIT FFO, calculated as set forth below under the caption "Funds from
Operations." NAREIT FFO is a non-GAAP supplemental measure to net income.
•Average occupancy, calculated as average daily occupied apartment homes as a
percentage of total apartment homes.
For purposes of evaluating comparative operating performance, we categorize our
properties as "same-store" or "non-same-store". Same-store portfolio properties
include properties that were owned for the entirety of the years being compared,
and exclude properties under redevelopment or development and properties
acquired, sold or classified as held for sale during the years being compared.
We define development properties as those for which we have planned or ongoing
major construction activities on existing or acquired land pursuant to an
authorized development plan. Development properties are categorized as
same-store when they have reached stabilized occupancy (90%) before the start of
the prior year. We define redevelopment properties as those for which we have
planned or ongoing significant development and construction activities on
existing or acquired buildings pursuant to an authorized plan, which has an
impact on current operating results, occupancy and the ability to lease space
with the intended result of a higher economic return on the property. We
categorize a redevelopment property as same-store when redevelopment activities
have been complete for the majority of each year being compared.
Overview
Our revenues are derived primarily from the ownership and operation of income producing properties. As ofJune 30, 2022 , we owned approximately 8,900 residential apartment homes in theWashington, DC metro and Southeastern regions. We also own and operate approximately 300,000 square feet of commercial space in theWashington, DC metro region. During the third quarter of 2021, we sold twelve office properties (the "Office Portfolio") and eight retail properties (the "Retail Portfolio") (see note 3 to the condensed consolidated financial statements) for contract sale prices of$766.0 million and$168.3 million , respectively. Both the Office Portfolio and Retail Portfolio meet the criteria for classification as discontinued operations in our condensed consolidated financial statements. Our remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 10 to the condensed consolidated financial statements). The dispositions of the Office Portfolio and Retail Portfolio are part of a strategic shift away from the commercial sector to the residential sector, which simplified our portfolio to one reportable segment (residential) (the "strategic transformation"). We used the net proceeds from the sales to fund the expansion of our residential platform through acquisitions in Southeastern markets and to reduce our leverage by repaying outstanding debt. During the third and fourth quarters of 2021, we completed the acquisitions of two apartment communities inGeorgia for contract purchase prices of$48.0 million and$106.0 million , respectively. The apartment communities have a combined total of 730 apartment homes. During the 2022 Period, we completed acquisitions of three apartment communities inGeorgia with a combined total of 1,079 apartment homes for a total contract purchase price of$283.2 million . We believe the successful execution of this research-driven strategic shift will lead to greater, more sustainable growth. In connection with this strategic transformation, we are redesigning our operating model for purposes of more efficiently and effectively supporting residential operations. This operating model redesign includes insourcing the property-level management activities currently performed by third-party management companies. Costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits, are included in Transformation costs on our consolidated statements of operations. We recognized$2.0 million and$4.2 million of transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations during the 2022 Quarter and 2022 Period, respectively, and anticipate incurring approximately$6.3 -$7.3 million of additional transformation costs during 2022. We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023. 24 --------------------------------------------------------------------------------
Operating Results
Net loss, NOI and NAREIT FFO for the three months ended
Three Months Ended June 30,
2022 2021 $ Change % Change
Net loss $ (8,874) $ (6,992) $ (1,882) 26.9 %
NOI (1) $ 32,796 $ 26,553 $ 6,243 23.5 %
NAREIT FFO (2) $ 15,165 $ 20,559 $ (5,394) (26.2) %______________________________
(1) See page 27 of the MD&A for a reconciliation of NOI to net income. (2) See page 37 of the MD&A for a reconciliation of NAREIT FFO to net income. The increase in net loss is primarily due to lower income from discontinued operations ($9.7 million ) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($6.7 million ), higher general and administrative expenses ($1.4 million ), lower other income ($1.5 million ) and higher property management expenses ($0.3 million ). These were partially offset by higher NOI ($6.2 million ), the loss on interest rate derivatives in 2021 ($5.8 million ), lower interest expense ($4.0 million ) and lower transformation expenses ($1.8 million ). The higher NOI is primarily due to the acquisitions ofAssembly Eagles Landing ($1.2 million ) and The Oxford ($0.3 million ) in 2021 and Carlyle ofSandy Spring ($0.8 million ),Marietta Crossing ($0.8 million ) andAlder Park ($0.5 million ) in 2022, higher NOI from same-store properties ($1.2 million ) and higher NOI from Trove ($1.1 million ), which achieved stabilization in the fourth quarter of 2021, and higher NOI at Watergate 600 ($0.3 million ). The higher same-store NOI was primarily due to higher rental rates and occupancy. Residential same-store average occupancy for our portfolio increased to 95.8% as ofJune 30, 2022 from 95.1% as ofJune 30, 2021 , due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic. The lower NAREIT FFO is primarily due to lower income from discontinued operations, net of depreciation and amortization ($20.0 million ), lower other income ($1.5 million ), higher general and administrative expenses ($1.4 million ) and higher property management expenses ($0.3 million ). These were partially offset by higher NOI ($6.2 million ), the loss on interest rate derivatives in 2021 ($5.8 million ), lower interest expense ($4.0 million ) and lower transformation expenses ($1.8 million ).
Investment Activity
Significant investment transactions during the 2022 Period included the following: •Acquisition of Carlyle ofSandy Springs , a 389-unit apartment community inSandy Springs, Georgia for a contract purchase price of$105.6 million during the first quarter of 2022. •Acquisition ofMarietta Crossing , a 420-unit apartment community inMarietta, Georgia for a contract purchase price of$107.9 million during the 2022 Quarter. We assumed a$42.8 million mortgage with this acquisition. •Acquisition ofAlder Park , a 270-unit apartment community inSmyrna, Georgia for a contract purchase price of$69.8 million during the 2022 Quarter. We assumed a$33.7 million mortgage with this acquisition.
Financing Activity
Significant financing transactions during the 2022 Period included the following: •Issuance of 1.0 million common shares at a weighted average price per share of$26.27 for net proceeds of$26.9 million through our at-the-market program. As ofJune 30, 2022 , the interest rate on the$700.0 million unsecured revolving credit facility ("Revolving Credit Facility") was one month LIBOR plus 1.79% and the facility fee was 0.20%. As ofJuly 25, 2022 , we had no outstanding balance and a full borrowing capacity of$700.0 million on our Revolving Credit Facility and$31.4 million of cash on hand.
Capital Requirements
We have no debt maturities scheduled until the third quarter of 2023. We expect to have additional capital requirements as set forth on page 3 3 (Liquidity and Capital Resources - Capital Requirements).
25
--------------------------------------------------------------------------------Results of Operations
The discussion that follows is based on our consolidated results of operations for the 2022 Quarter and 2021 Quarter. The ability to compare one period to another is significantly affected by acquisitions and dispositions made during 2022 and 2021 (see note 3 to the consolidated financial statements).
Net Operating Income
NOI, defined as real estate rental revenue less direct real estate operating
expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real
estate revenue and the results of discontinued operations (including the gain or
loss on sale, if any), plus interest expense, depreciation and amortization,
lease origination expenses, general and administrative expenses, acquisition
costs, real estate impairment, casualty gain and losses and gain or loss on
extinguishment of debt. NOI does not include management expenses, which consist
of corporate property management costs and property management fees paid to
third parties. We believe that NOI is a useful performance measure because, when
compared across periods, it reflects the impact on operations of trends in
occupancy rates, rental rates and operating costs on an unleveraged basis,
providing perspective not immediately apparent from net income. NOI excludes
certain components from net income in order to provide results more closely
related to a property's results of operations. For example, interest expense is
not necessarily linked to the operating performance of a real estate asset. In
addition, depreciation and amortization, because of historical cost accounting
and useful life estimates, may distort operating performance at the property
level. As a result of the foregoing, we provide NOI as a supplement to net
income, calculated in accordance with GAAP. NOI does not represent net income or
income from continuing operations calculated in accordance with GAAP. As such,
NOI should not be considered an alternative to these measures as an indication
of our operating performance. A reconciliation of NOI to net loss follows.
26
--------------------------------------------------------------------------------2022 Quarter Compared to 2021 Quarter
The following table reconciles NOI to net loss and provides the basis for our
discussion of our consolidated results of operations and NOI in the 2022 Quarter
compared to the 2021 Quarter. All amounts are in thousands, except percentage
amounts.
Three Months Ended June 30,
2022 2021 $ Change % Change
Residential revenue:
Same-store portfolio $ 37,198 $ 35,321 $ 1,877 5.3 %
Acquisitions (1) 6,643 - 6,643 100.0 %
Development (2) 2,500 1,330 1,170 88.0 %
Non-residential (3) 305 211 94 44.5 %
Total 46,646 36,862 9,784 26.5 %
Residential expenses:
Same-store portfolio 13,259 12,550 709 5.6 %
Acquisitions 3,049 - 3,049 100.0 %
Development 934 853 81 9.5 %
Non-residential 70 65 5 7.7 %
Total 17,312 13,468 3,844 28.5 %
Residential NOI:
Same-store portfolio 23,939 22,771 1,168 5.1 %
Acquisitions 3,594 - 3,594 100.0 %
Development 1,566 477 1,089 228.3 %
Non-residential 235 146 89 61.0 %
Total 29,334 23,394 5,940 25.4 %
Other NOI (4) 3,462 3,159 303 9.6 %
Total NOI 32,796 26,553 6,243 23.5 %
Reconciliation to net loss:
Property management expenses (1,796) (1,486) (310) 20.9 %
General and administrative expenses (7,656) (6,325) (1,331) 21.0 %
Transformation costs (2,023) (3,780) 1,757 (46.5) %
Depreciation and amortization (24,039) (17,303) (6,736) 38.9 %
Interest expense (6,156) (10,158) 4,002 (39.4) %
Loss on interest rate derivatives - (5,760) 5,760 (100.0) %
Other income - 1,522 (1,522) (100.0) %
Discontinued operations (5):
Income from operations of properties sold
or held for sale - 9,745 (9,745) (100.0) %
Net loss $ (8,874) $ (6,992) $ (1,882) 26.9 %
______________________________
(1)Acquisitions:
2021: The Oxford andAssembly Eagles Landing 2022: Carlyle ofSandy Springs ,Alder Park ,Marietta Crossing (2)Development/redevelopment: Trove,Riverside Development (multifamily development adjacent toRiverside Apartments ) (3)Non-residential: Includes revenues and expenses from retail operations at residential properties. (4)Other (classified as continuing operations): Watergate 600 (5)Discontinued operations: 2021 Office -1901 Pennsylvania Avenue ,515 King Street ,1220 19th Street ,1600 Wilson Boulevard , Silverline Center,Courthouse Square ,2000 M Street ,1140 Connecticut Avenue ,Army Navy Club ,1775 Eye Street , Fairgate at Ballston andArlington Tower 2021 Retail -Takoma Park , Westminster, Concord Centre,Chevy Chase Metro Plaza ,800 S. Washington Street ,Randolph Shopping Center ,Montrose Shopping Center andSpring Valley Village Real Estate Rental Revenue
Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of multifamily residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the
27
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recovery of operating expenses from our residents, (c) credit losses on lease
related receivables, (d) revenue from leases of retail space at our apartment
communities and (e) parking and other tenant charges.
Real estate rental revenue from same-store residential properties increased $1.9
million , or 5.3%, to $37.2 million for the 2022 Quarter, compared to $35.3
million for the 2021 Quarter, primarily due to higher rental income ($1.9
million ), lower rent abatements ($0.5 million ) and higher move-in charges ($0.1
million ), partially offset by higher credit losses ($0.6 million ).
Real estate rental revenue from acquisitions increased $6.6 million due to the
acquisitions of Carlyle of Sandy Springs ($1.7 million ) during the first quarter
of 2022, Marietta Crossing ($1.1 million ) and Alder Park ($0.8 million ) during
the 2022 Quarter, Assembly Eagles Landing ($2.1 million ) during the fourth
quarter of 2021, and The Oxford ($0.9 million ) during the third quarter of 2021.
Real estate rental revenue from development properties increased
Average occupancy for residential properties for the 2022 Quarter and 2021
Quarter was as follows:
June 30, 2022 June 30, 2021 % Change
Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total
95.8 % 94.4 % 95.5 % 95.1 % 49.9 % 92.5 % 0.7 % 44.5 % 3.0 % The increase in same-store average occupancy was primarily due to higher average occupancy at The Kenmore,Park Adams ,3801 Connecticut Avenue , Assembly Germantown and Assembly Herndon, partially offset by lower average occupancy at The Ashby atMcLean andMaxwell .
Real Estate Expenses
Residential real estate expenses as a percentage of residential revenue for the 2022 Quarter and the 2021 Quarter were 37.1% and 36.5%, respectively.
Real estate expenses from same-store residential properties increased$0.7 million , or 5.6%, to$13.3 million for the 2022 Quarter, compared to$12.6 million for the 2021 Quarter, primarily due to higher real estate taxes ($0.3 million ), higher utilities ($0.2 million ) and higher insurance ($0.1 million ) expenses. Real estate expenses from acquisitions increased$3.0 million due to the acquisitions of Carlyle ofSandy Springs ($0.9 million ) during the first quarter of 2022,Marietta Crossing ($0.4 million ) andAlder Park ($0.3 million ) during the 2022 Quarter,Assembly Eagles Landing ($0.8 million ) during the fourth quarter of 2021, and The Oxford ($0.6 million ) during the third quarter of 2021.
Other NOI
Other NOI classified as continuing operations increased due to lower NOI at
Watergate 600 (
Other Income and Expenses
Property management expenses: These expenses include costs directly related to the third-party management of property operations and corporate management and other costs. General and administrative expenses: Increase primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($0.9 million ), higher legal fees ($0.8 million ) and higher office rent ($0.3 million ) from the commencement of the corporate office lease during the third quarter of 2021. The increase was partially offset by lower short term incentive compensation expense ($0.7 million ) during the 2022 Quarter. Transformation costs: Decrease of$1.8 million during 2022 Quarter primarily due to lower consulting and professional fees ($2.1 million ) and lower severance expense ($0.8 million ), partially offset by higher software depreciation ($0.5 million ), higher employee time allocations ($0.3 million ) and higher software costs ($0.2 million ). 28 -------------------------------------------------------------------------------- Depreciation and amortization: Increase primarily due to the acquisitions ofMarietta Crossing ($1.3 million ),Alder Park ($0.6 million ), Carlyle ofSandy Springs ($2.4 million ),Assembly Eagles Landing ($1.9 million ) and The Oxford ($0.5 million ) and higher depreciation and amortization at Watergate 600 ($0.2 million ). The increase was partially offset by lower depreciation and amortization at same-store residential properties ($0.1 million ) and Trove ($0.1 million ). Interest Expense: Interest expense by debt type for the three months endedJune 30, 2022 and 2021 was as follows (in thousands): Three Months Ended June 30, Debt Type 2022 2021 $ Change % Change Notes payable$ 5,055 $ 9,475 $ (4,420) (46.6) % Mortgage notes payable 490 - 490 100.0 % Line of credit 701 854 (153) (17.9) % Capitalized interest (90) (171) 81 (47.4) % Total$ 6,156 $ 10,158 $ (4,002) (39.4) % •Notes payable: Decrease primarily due to the prepayment of$300.0 million of unsecured notes during the third quarter of 2021 that had been scheduled to mature inOctober 2022 and the prepayment of a$150.0 million portion of the 2018 Term Loan during the third quarter of 2021. •Mortgage notes payable: Increase due to assumed mortgages of$42.8 million and$33.7 million in the acquisitions ofMarietta Crossing andAlder Park , respectively, during the 2022 Quarter. •Line of credit: Decrease primarily due to no borrowings in the 2022 Quarter, as compared to weighted average borrowings of$60.9 million and weighted average interest rate of 1.1% during the 2021 Quarter. •Capitalized interest: Decrease primarily due to ceasing capitalization of interest on spending related to the multifamily development adjacent toRiverside Apartments due to a pause in development activities resulting from macroeconomic uncertainty.
Other income: During the 2021 Quarter we recognized
Loss on interest rate derivatives: We terminated five interest rate swap arrangements with an aggregate notional value of$150.0 million and recognized a$5.8 million loss on interest rate derivatives during the 2021 Quarter (see note 6 to the consolidated financial statements).
Discontinued operations
Income from operations of properties sold or held for sale: Decrease due to the
sale of the Office Portfolio and the Retail Portfolio during the third quarter
of 2021.
29
--------------------------------------------------------------------------------2022 Period Compared to 2021 Period
The following tables reconcile NOI to net income (loss) and provide the basis
for our discussion of our consolidated results of operations and NOI in the 2022
Period compared to the 2021 Period. All amounts are in thousands, except
percentage amounts.
Six Months Ended June 30,
2022 2021 $ Change % Change
Residential revenue:
Same-store portfolio $ 73,931 $ 70,233 $ 3,698 5.3 %
Acquisitions (1) 10,568 - 10,568 100.0 %
Development (2) 4,931 2,306 2,625 113.8 %
Non-residential (3) 550 490 60 12.2 %
Total 89,980 73,029 16,951 23.2 %
Residential expenses:
Same-store portfolio 26,397 25,586 811 3.2 %
Acquisitions 4,892 - 4,892 100.0 %
Development 1,779 1,574 205 13.0 %
Non-residential 145 134 11 8.2 %
Total 33,213 27,294 5,919 21.7 %
Residential NOI:
Same-store portfolio 47,534 44,647 2,887 6.5 %
Acquisitions 5,676 - 5,676 100.0 %
Development 3,152 732 2,420 (330.6) %
Non-residential 405 356 49 13.8 %
Total 56,767 45,735 11,032 24.1 %
Other NOI (4) 6,681 6,434 247 3.8 %
Total NOI 63,448 52,169 11,279 21.6 %
Reconciliation to net loss:
Property management expenses (3,546) (2,949) (597) (20.2) %
General and administrative expenses (14,595) (11,929) (2,666) (22.3) %
Transformation costs (4,246) (3,780) (466) (12.3) %
Depreciation and amortization (46,239) (34,290) (11,949) (34.8) %
Interest expense (11,806) (20,281) 8,475 41.8 %
Loss on interest rate derivatives - (5,760) 5,760 100.0 %
Other income 386 2,806 (2,420) 86.2 %
Discontinued operations (5):
Income from operations of properties sold or
held for sale - 15,875 (15,875) (100.0) %
Net loss $ (16,598) $ (8,139) $ (8,459) (103.9) %
______________________________
(1)Acquisitions:
2021: The Oxford and
2022: Carlyle of
(2)Development/redevelopment:
Trove,
(3)Non-residential:
Includes revenues and expenses from retail operations at residential properties.
(4)Other (classified as continuing operations)
Watergate 600
(5)Discontinued operations:
2021 Office -1901 Pennsylvania Avenue ,515 King Street ,1220 19th Street ,1600 Wilson Boulevard , Silverline Center,Courthouse Square ,2000 M Street ,1140 Connecticut Avenue ,Army Navy Club ,1775 Eye Street , Fairgate at Ballston andArlington Tower 2021 Retail -Takoma Park , Westminster, Concord Centre,Chevy Chase Metro Plaza ,800 S. Washington Street ,Randolph Shopping Center ,Montrose Shopping Center andSpring Valley Village 30
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Real Estate Rental Revenue
Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of multifamily residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.
Real estate rental revenue from same-store residential properties increased
Real estate rental revenue from acquisitions increased$10.6 million due to the acquisitions of Carlyle ofSandy Springs ($2.8 million ) during the first quarter of 2022,Marietta Crossing ($1.1 million ) andAlder Park ($0.8 million ) during the 2022 Quarter,Assembly Eagles Landing ($4.0 million ) during the fourth quarter of 2021 and The Oxford ($1.9 million ) during the third quarter of 2021.
Real estate rental revenue from development properties increased
Average occupancy for residential properties for the 2022 Period and 2021 Period
was as follows:
June 30, 2022 June 30, 2021 % Change
Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total
95.8 % 94.5 % 95.5 % 94.7 % 40.6 % 91.6 % 1.1 % 53.9 % 3.9 %
The increase in same-store average occupancy was primarily due to higher average
occupancy at The Kenmore,
Real Estate Expenses
Residential real estate expenses as a percentage of residential revenue for the 2022 Period and 2021 Period were 36.9% and 37.4%, respectively.
Real estate expenses from same-store residential properties increased$0.8 million , or 3.2%, to$26.4 million for the 2022 Period, compared to$25.6 million for the six months endedJune 30, 2021 , primarily due to higher real estate tax ($0.3 million ), utilities ($0.2 million ), insurance ($0.2 million ) and contract maintenance and supplies ($0.1 million ) expenses. Real estate expenses from acquisitions increased$4.9 million due to the acquisitions of Carlyle ofSandy Springs ($1.4 million ) during the first quarter of 2022,Marietta Crossing ($0.4 million ) andAlder Park ($0.3 million ) during the 2022 Quarter,Assembly Eagles Landing ($1.8 million ) during the fourth quarter of 2021, and The Oxford ($1.0 million ) during the third quarter of 2021.
Other NOI
Other NOI classified as continuing operations increased due to higher NOI at
Watergate 600 (
Other Income and Expenses
Property management expenses: These expenses include costs directly related to the third-party management of property operations and corporate management and other costs, respectively. Increase primarily due to the acquisitions of The Oxford andAssembly Eagles Landing during the third and fourth quarters of 2021, the acquisitions of Carlyle ofSandy Springs ,Marietta Crossing andAlder Park during the 2022 Period and Trove reaching stabilization during the fourth quarter of 2021. General and administrative expenses: Increase primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($1.7 million ), higher legal fees ($0.8 million ), higher office rent ($0.6 million ) from the commencement of the corporate office lease during the third quarter of 2021, higher accounting fees ($0.4 million ) and higher recruitment fees ($0.1 million ). The increase was partially offset by lower short term incentive compensation expense ($0.9 million ) during the 2022 Quarter. 31 -------------------------------------------------------------------------------- Transformation costs: Increase of$0.5 million primarily due to higher software depreciation ($1.0 million ), higher employee time allocations ($0.6 million ) related to the strategic transformation, higher software costs ($0.3 million ) and higher rebranding expenses ($0.1 million ), partially offset by lower consulting ($1.0 million ) and severance ($0.6 million ) expenses. Depreciation and amortization: Increase primarily due to the acquisitions ofMarietta Crossing ($1.3 million ),Alder Park ($0.6 million ), Carlyle ofSandy Springs ($3.6 million ),Assembly Eagles Landing ($4.7 million ) and The Oxford ($1.1 million ) and higher depreciation and amortization at same-store residential properties ($0.3 million ) and at Watergate 600 ($0.3 million ).
Interest Expense: Interest expense by debt type for the six months ended
Six Months Ended June 30,
Debt Type 2022 2021 $ Change % Change
Notes payable $ 10,204 $ 18,961 $ (8,757) (46.2) %
Mortgage notes payable 490 - 490 100.0 %
Line of credit 1,395 1,699 (304) (17.9) %
Capitalized interest (283) (379) 96 (25.3) %
Total $ 11,806 $ 20,281 $ (8,475) (41.8) %
•Notes payable: Decrease primarily due to the prepayment of $300.0 million of
unsecured notes during the third quarter of 2021 that had been scheduled to
mature in October 2022 and the prepayment of a $150.0 million portion of the
2018 Term Loan during the third quarter of 2021.
•Mortgage notes payable: Increase due to the assumed mortgages of $42.8 million
and $33.7 million in the acquisitions of Marietta Crossing and Alder Park ,
respectively, during the 2022 Period.
•Line of credit: Decrease primarily due to no borrowings in the 2022 Period, as
compared to weighted average borrowings of $59.5 million and weighted average
interest rate of 1.1% during the 2021 Period.
•Capitalized interest: Decrease primarily due to ceased capitalization of
interest on spending related to the multifamily development adjacent to
Riverside Apartments due to a pause in development activities.
Loss on interest rate derivatives: We terminated five interest rate swap
arrangements with an aggregate notional value of $150.0 million and recognized a
$5.8 million loss on interest rate derivatives during the 2021 Period (see note
6 to the consolidated financial statements).
Other income: Income during 2022 Period relates to real estate tax refunds ($0.4
million ) received in Q1 2022 on previously sold properties. During the 2021
Period, we recognized $1.3 million in other income related to a legal settlement
and $1.5 million related to a real estate tax refund for an office property sold
in 2018 during 2021 Period.
Discontinued operations
Income from properties sold or held for sale: Decrease due to the sale of the Office Portfolio and the Retail Portfolio during the third quarter of 2021.
32
--------------------------------------------------------------------------------Liquidity and Capital Resources
We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements, including meeting our debt obligations, capital commitments and contractual obligations, as well as the payment of dividends, on-going transformational costs and funding possible growth opportunities. Through our Office Portfolio and Retail Portfolio sales in 2021, which had a combined contract sales price of approximately$934.3 million , we executed strategic transactions that will allow us to pursue residential expansion in Southeastern markets, meet our debt obligations for the next twelve months, and pay a dividend on a quarterly basis. In connection with our strategic transformation, we are designing our operating model for purposes of more efficiently and effectively supporting residential operations. We recognized$2.0 million and$4.2 million of transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations during the 2022 Quarter and 2022 Period, respectively, and anticipate incurring approximately$6.3 -$7.3 million of additional transformation costs during 2022. We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023. We also believe we have adequate liquidity beyond 2022, with only$100.0 million of scheduled debt maturities within the next five years. As ofJuly 25, 2022 , we had cash and cash equivalents totaling$31.4 million and no outstanding balance and a full borrowing capacity of$700.0 million on our Revolving Credit Facility, resulting in a total liquidity position of$731.4 million . While we currently intend to continue to pay dividends at or about current levels, we will continue to assess the payment of our dividends on a quarterly basis. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our board of trustees which considers, among other factors, trends in our levels of NAREIT FFO and ongoing capital requirements to achieve a targeted payout ratio.
Capital Requirements
As of the end of the 2022 Quarter, our full-year 2022 capital requirements are summarized below: •Funding dividends and distributions to our shareholders; •Approximately$32.5 -$37.5 million to invest in our existing portfolio of operating assets; •Approximately$0.8 -$1.0 million to invest in our development and redevelopment projects; and •Funding for potential property acquisitions throughout 2022, offset by proceeds from potential property dispositions. There can be no assurance that our capital requirements will not be materially higher or lower than the above expectations. We currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements for the remainder of 2022. However, as a result of the uncertainty of the general market conditions in the greaterWashington, DC metro and Southeastern regions, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated above. If capital were not available, we may be unable to satisfy the distribution requirement applicable to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating assets. Debt Financing We generally use secured or unsecured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages to meet our borrowing needs. Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets. If we issue unsecured debt in the future, we will seek to "ladder" the maturities of our debt to mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate. 33 --------------------------------------------------------------------------------
As of
[[Image Removed: wre-20220630_g1.jpg]]
Future Maturities of Debt
Revolving
Credit
Year Secured Debt Unsecured Debt Facility Total Debt Average Interest Rate
2022 - $ - $ - $ - -%
2023 - 100,000 (2) - 100,000 2.3%
2024 - - - - -%
2025 - - - - -%
2026 - - - - -%
Thereafter 76,554 (1) 400,000 - 476,554 4.5%
Scheduled principal payments
$ -$ 576,554 4.1% Net premiums/discounts (4,936) (127) - (5,063) Loan costs, net of amortization (42) (2,738) - (2,780) Total$ 71,576 $ 497,135 $ -$ 568,711 4.1%
______________________________
(1) WashREIT assumed mortgages of$42.8 million and$33.7 million in the acquisitions ofMarietta Crossing andAlder Park , respectively, during the 2022 Quarter. The mortgages mature onMay 1, 2030 . (2) WashREIT entered into an interest rate swap to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed rate for the remaining$100.0 million portion of the 2018 Term Loan. The interest rates are fixed through the term loan maturity ofJuly 2023 . The weighted average maturity for our debt is 6.9 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations. From time to time, we may seek to repurchase and cancel our outstanding secured and unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Debt Covenants
Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and secured and unsecured notes, we are subject to customary operating covenants and maintenance of various financial ratios.
Failure to comply with any of the covenants under our Revolving Credit Facility,
2018 Term Loan, secured and unsecured notes or other debt instruments could
result in a default under one or more of our debt instruments. This could cause
our lenders
34
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to accelerate the timing of payments and could therefore have a material adverse
effect on our business, operations, financial condition and liquidity. In
addition, our ability to draw on our Revolving Credit Facility or incur other
unsecured debt in the future could be restricted by the debt covenants.
As of
Common Equity
We have authorized for issuance 150.0 million common shares, of which 87.4
million shares were outstanding at
OnFebruary 17, 2021 , we entered into separate amendments to each of our existing equity distribution agreements ("Original Equity Distribution Agreements") with each ofWells Fargo Securities, LLC ,BNY Mellon Capital Markets, LLC ,Capital One Securities, Inc. ,Citigroup Global Markets Inc. ,Goldman Sachs & Co. LLC ,J.P. Morgan Securities LLC ,KeyBanc Capital Markets Inc. andTruist Securities, Inc. (f/k/aSunTrust Robinson Humphrey, Inc. ), each datedMay 4, 2018 (collectively, as amended, the "Equity Distribution Agreements") for our at-the-market program. Also onFebruary 17, 2021 , we entered into a separate equity distribution agreement withBTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the "BTIG Equity Distribution Agreement"). OnSeptember 22, 2021 ,BTIG, LLC notified us that it was terminating the BTIG Equity Distribution Agreement, effective as ofSeptember 27, 2021 . Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of$550.0 million of our common shares of beneficial interest,$0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. We did not issue common shares under the Equity Distribution Agreements during the 2022 Quarter or 2021 Quarter. Our issuances and net proceeds on the Equity Distribution Agreements for the 2022 Period and 2021 Period were as follows ($ in thousands, except per share data): Six Months Ended June 30, 2022 2020 Issuance of common shares 1,032 24 Weighted average price per share$ 26.27 $ 22.06 Net proceeds$ 26,851 $ 467
We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market.
Our issuances and net proceeds on the dividend reinvestment program for the
three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Issuance of common shares 10 22 20 45
Weighted average price per share
$ 25.44 $ 22.63 Net proceeds $ 254$ 489 $ 518$ 1,009 Preferred Equity WashREIT's board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As ofJune 30, 2022 , no preferred shares were issued and outstanding. 35 --------------------------------------------------------------------------------
Historical Cash Flows
Cash flows from operations are an important factor in our ability to sustain our
dividend at its current rate. If our cash flows from operations were to decline
significantly from current levels, we may have to reduce our dividend.
Consolidated cash flow information is summarized as follows (in thousands):
Six Months Ended June 30, Change
2022 2021 $ %
Net cash provided by operating activities
(47.4) %
Net cash used in investing activities (217,129) (18,195) (198,934) 1,093.3 %
Net cash used in financing activities (4,299) (48,687) 44,388 (91.2) %
Net cash provided by operating activities decreased primarily due to the sales of the Office Portfolio and Retail Portfolio in 2021 (see note 3 to the consolidated financial statements) and timing differences on the payment of certain liabilities.
Net cash used in investing activities increased primarily due to the acquisition ofMarietta Crossing ,Alder Park and Carlyle ofSandy Springs during the 2022 Period.
Net cash used in financing activities decreased primarily due to higher net proceeds from equity issuances and lower dividends paid in the 2022 Period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of
36
--------------------------------------------------------------------------------Funds From Operations
NAREIT FFO is a widely used measure of operating performance for real estate companies. In its 2018 NAREIT FFO Whitepaper Restatement, NAREIT defined NAREIT FFO as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties; impairments of depreciable real estate, and real estate depreciation and amortization. We consider NAREIT FFO to be a standard supplemental measure for REITs because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time. Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. NAREIT FFO is a non-GAAP measure.
The following table provides the calculation of our NAREIT FFO and a
reconciliation of NAREIT FFO to net loss for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net loss $ (8,874) $
(6,992)
24,039 17,303 46,239 34,290
Discontinued operations:
Depreciation and amortization - 10,248 - 22,904
NAREIT FFO $ 15,165 $ 20,559 $ 29,641 $ 49,055 Critical Accounting Estimates
We base the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There were no changes made by management to the critical accounting policies in the three and six months endedJune 30, 2022 . We discuss the most critical estimates in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onFebruary 18, 2022 . 37
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