SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR QUARTER ENDED SEPTEMBER 30, 2001 COMMISSION FILE NO. 1-6622
------------------ ------
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 53-0261100
__________________________________________ ____________________________________
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
6110 EXECUTIVE BOULEVARD, ROCKVILLE, MARYLAND 20852
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (301) 984-9400
--------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO ____
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the close of the period covered by this report.
SHARES OF BENEFICIAL INTEREST 38,697,250
1
WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
Page
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Part I: Financial Information
---------------------
Item l. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 14
Part II: Other Information
-----------------
Item l. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Part I
FINANCIAL INFORMATION
---------------------
The information furnished in the accompanying Consolidated Balance Sheets,
Statements of Income, Statements of Cash Flows and Statement of Changes in
Shareholders' Equity reflect all adjustments, consisting of normal recurring
items, which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and of cash flows
for the interim periods. The accompanying financial statements and notes
thereto should be read in conjunction with the financial statements and notes
for the three years ended December 31, 2000 included in the Trust's 2000 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
2
Part I
Item I. Financial Statements
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share amounts)
(Unaudited)
September 30, December 31,
2001 2000
------------------ ----------------
Assets
Real estate at cost $746,858 $698,513
Accumulated depreciation (116,463) (100,906)
---------------- --------------
Total investment in real estate 630,395 597,607
Cash and cash equivalents 32,953 6,426
Rents and other receivables, net of allowance for doubtful
accounts of $1,902 and $1,743, respectively 10,705 9,795
Prepaid expenses and other assets 20,748 19,587
---------------- --------------
$694,801 $633,415
================ ==============
Liabilities
Accounts payable and other liabilities $11,776 $13,048
Advance rents 2,791 3,269
Tenant security deposits 6,071 5,624
Mortgage notes payable 85,641 86,260
Notes payable 265,000 265,000
---------------- --------------
371,279 373,201
---------------- --------------
Minority interest 1,594 1,558
---------------- --------------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000
shares authorized: 38,693 and 35,740 shares issued and
outstanding at September 30, 2001 and December 31,
2000, respectively 387 357
Additional paid-in capital 321,541 258,299
---------------- --------------
321,928 258,656
---------------- --------------
$694,801 $633,415
================ ==============
See accompanying notes to financial statements
3
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(Unaudited)
Quarter Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
--------------- -------------- ------------- --------------
Real estate rental revenue $ 37,873 $ 34,230 $ 110,618 $ 99,520
Real estate expenses (10,813) (9,676) (31,805) (28,679)
--------------- -------------- ------------- --------------
Operating income 27,060 24,554 78,813 70,841
Depreciation and amortization (6,800) (5,810) (19,694) (16,889)
--------------- -------------- ------------- --------------
Income from real estate 20,260 18,744 59,119 53,952
Other income 302 288 1,251 679
Interest expense (6,731) (6,394) (20,178) (18,796)
General and administrative (1,303) (1,914) (4,541) (5,757)
--------------- -------------- ------------- --------------
Income before gain on sale of real estate 12,528 10,724 35,651 30,078
Gain on sale of real estate 4,296 2,069 4,296 3,567
--------------- -------------- ------------- --------------
Net Income $ 16,824 $ 12,793 $ 39,947 $ 33,645
=============== ============== ============= ==============
Per share information based on the
weighted average number
of shares outstanding
Shares-- Basic 38,460 35,734 37,312 35,734
Shares-- Diluted 38,795 35,932 37,618 35,829
Income before gain on sale of real
estate - Basic $0.33 $0.30 $0.96 $0.84
=============== ============== ============= ==============
Income before gain on sale of real
estate - Diluted $0.32 $0.30 $0.95 $0.84
=============== ============== ============= ==============
Net income per share-- Basic $0.44 $0.36 $1.07 $0.94
=============== ============== ============= ==============
Net income per share-- Diluted $0.43 $0.36 $1.06 $0.94
=============== ============== ============= ==============
Dividends paid $0.3325 $0.3125 $0.9775 $0.9175
=============== ============== ============= ==============
See accompanying notes to financial statements
4
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED September 30, 2001
(In Thousands)
(Unaudited)
Additional Shareholders'
Shares Par Value Paid in Capital Equity
------------------------ -------------------- -------------------- -----------------
Balance, December 31, 2000 35,740 $357 $258,299 $258,656
Net income - - 39,947 39,947
Dividends - - (36,780) (36,780)
Share Offering 2,535 25 53,083 53,108
Share Options Exercised
and Share Grants 418 5 6,992 6,997
----------------- ----------------- ---------------- --------------
Balance, September 30, 2001 38,693 $387 $321,541 $321,928
================= ================= ================ ==============
See accompanying notes to financial statements
5
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended September 30,
2001 2000
---------------- ----------------
Cash Flow From Operating Activities
Net income $39,947 $33,645
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (4,296) (3,567)
Depreciation and amortization 19,694 16,703
Increases in other assets (3,296) (3,061)
Changes in other liabilities (541) (1,740)
---------------- ----------------
Net cash provided by operating activities 51,508 41,980
---------------- ----------------
Cash Flow From Investing Activities
Capital improvements to real estate (8,794) (12,248)
Non-real estate capital improvements (212) (251)
Real estate acquisitions (46,070) (9,503)
Cash received for sale of real estate 8,115 5,732
---------------- ----------------
Net cash used in investing activities (46,961) (16,270)
---------------- ----------------
Cash Flow From Financing Activities
Share offering 53,083 -
Dividends paid (36,780) (32,786)
Borrowings - Lines of credit - 7,000
Principal payments - Mortgage note payable (619) (573)
Share options exercised 6,296 183
---------------- ----------------
Net cash provided by (used in) financing activities 21,980 (26,176)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 26,527 (466)
Cash and cash equivalents at beginning of year 6,426 4,716
---------------- ----------------
Cash and cash equivalents at end of period $32,953 $4,250
================ ================
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid for interest during the nine months ended September 30 $22,082 $21,869
================ ================
See accompanying notes to financial statements
6
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 1: NATURE OF BUSINESS
- --------------------------
Washington Real Estate Investment Trust ("WRIT" or the "Trust"), a Maryland real
estate investment trust, is a self-administered, self managed qualified equity
real estate investment trust, successor to a trust organized in 1960. The
Trust's business consists of the ownership of income-producing real estate
properties in the greater Washington - Baltimore region.
WRIT operates in a manner intended to enable it to qualify as a real estate
investment trust under the Internal Revenue Code (the "Code"). In accordance
with the Code, a trust which distributes its capital gains and at least 90% of
its taxable income to its shareholders each year (95% for years prior to 2001),
and which meets certain other conditions, will not be taxed on that portion of
its taxable income which is distributed to its shareholders. Accordingly, no
provision for Federal income taxes is required.
NOTE 2: ACCOUNTING POLICIES
- ---------------------------
Basis of Presentation
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
WRIT believes that the disclosures made are adequate to make the information
presented not misleading.
Comprehensive Income
WRIT has no items of comprehensive income that would require separate reporting
in the accompanying consolidated statements of income.
Earnings Per Common Share
"Basic earnings per share" is computed as net income divided by the weighted
average common shares outstanding. "Diluted earnings per share" is computed as
net income divided by the total weighted average common shares outstanding plus
the effect of dilutive common equivalent shares outstanding for the period.
Dilutive common equivalent shares reflect the assumed issuance of additional
common shares pursuant to certain of WRIT's share based compensation plans that
could potentially reduce or "dilute" earnings per share, based on the treasury
stock method.
New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement (as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133) establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments
7
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure to a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement is effective
for all fiscal quarters of fiscal years beginning after January 1, 2001.
Although WRIT currently has no derivative instruments, this statement will
affect derivative instruments acquired by WRIT in future periods.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 144 is effective for all quarters
of fiscal years beginning after December 15, 2001. WRIT does not believe the
standard will materially impact its financial statements.
Revenue Recognition
Residential properties are leased under operating leases with terms of generally
one year or less, and commercial properties are leased under operating leases
with average terms of three to five years. WRIT recognizes rental income and
rental abatements from its residential and commercial leases when earned in
accordance with SFAS No. 13. WRIT records an allowance for doubtful accounts
equal to the estimated uncollectible amounts. This estimate is based on WRIT's
historical experience and a review of the current status of its receivables.
Deferred Financing Costs
Costs associated with the issuance of notes payable are capitalized and
amortized using the effective interest rate method over the term of the related
notes.
Real Estate and Depreciation
Buildings are depreciated on a straight-line basis over estimated useful lives
not exceeding 50 years. All capital improvement expenditures associated with
replacements, improvements, or major repairs to real property are depreciated
using the straight-line method over their estimated useful lives ranging from 3
to 30 years. All tenant improvements are amortized over the shorter of the
useful life or the term of the lease. Maintenance and repair costs are charged
to expense as incurred.
WRIT recognizes impairment losses on long-lived assets used in operations when
indicators of impairment are present and the net undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Impairment is generally assessed through comparison of amortized value
to fair value. No such losses have been recorded during 2001 or 2000.
Cash and Cash Equivalents
Cash and cash equivalents include investments readily convertible to known
amounts of cash with original maturities of 90 days or less.
8
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 3: REAL ESTATE INVESTMENTS
- -------------------------------
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C. and Virginia as follows:
September 30, 2001
(in thousands)
---------------------
Office buildings $427,469
Industrial centers 118,666
Multifamily 105,293
Retail centers 95,430
--------
$746,858
========
WRIT acquired the following properties during 2001:
Purchase
Property Property Rentable Contract Cost
Acquisition Date Name Type Square Feet Units (in thousands)
- -----------------------------------------------------------------------------------------------------------------------
February 15, 2001 1611 N. Clarendon Multifamily 10,640 14 $ 1,500
April 19, 2001 One Central Plaza Office 274,138 N/A $44,400
On September 28, 2001, WRIT sold its 10400 Connecticut Avenue office building
for $8.4 million in cash resulting in a gain of approximately $4.3 million.
WRIT utilized the proceeds from this sale in a tax-deferred exchange (see Note
8: Subsequent Event). The total revenues and net income for this property were
$0.3 million and $0.1 million for the three months ended September 30, 2000 and
$1.0 million and $0.4 million for the nine months ended September 30, 2001.
NOTE 4: MORTGAGE NOTES PAYABLE
- -------------------------------
On September 20, 1999, WRIT assumed an $8.7 million mortgage note payable as
partial consideration for its acquisition of Avondale Apartments. The mortgage
bears interest at 7.875 percent per annum. Principal and interest are payable
monthly until November 1, 2005, at which time all unpaid principal and interest
are payable in full.
9
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
On September 27, 1999, WRIT executed a $50.0 million mortgage note payable
secured by the Ashby Apartments, Country Club Towers, Munson Hill Towers, Park
Adams and Roosevelt Towers. The mortgage bears interest at a fixed 7.14 percent
per annum and is payable monthly until October 1, 2009, at which time all unpaid
principal and interest are payable in full. The funds were used to repay
advances on its lines of credit.
Annual maturities of principal as of September 30, 2001 are as follows:
(in thousands)
2001 $ 215
2002 903
2003 7,368
2004 820
2005 26,335
Thereafter 50,000
-------
Total $85,641
=======
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of September 30, 2001, WRIT had two unsecured credit commitments in the
amount of $50 million and $25 million, with $0 outstanding under the credit
commitments leaving $75 million available. Under the terms of the credit
commitments, interest only is payable monthly, in arrears, on the unpaid
principal balance. All new advances will bear interest at LIBOR plus a spread
based on WRIT's credit rating on its publicly issued debt. All unpaid interest
and principal can be prepaid prior to the expiration of WRIT's interest rate
lock-in periods. This prepayment is not subject to a yield maintenance
obligation or other penalty on the $50 million credit commitment but is subject
to a yield maintenance obligation on the $25 million credit commitment.
The $50 million credit commitment requires WRIT to pay the lender unused
commitment fees at the rate of 0.200 percent per annum on the amount by which
the unused portion of the commitment exceeds the balance of outstanding advances
and term loans. The $25 million credit commitment requires WRIT to pay the
lender a facility management fee of 0.175 percent per annum on the commitment
amount of $25 million. These fees are payable quarterly. The credit
commitments also contain certain financial covenants related to debt, net worth,
and cash flow as well as non-financial covenants, all of which WRIT has met as
of September 30, 2001.
NOTE 6: NOTES PAYABLE
- ---------------------
On August 13, 1996 WRIT sold $50 million of 7.125 percent 7-year unsecured notes
due August 13, 2003, and $50 million of 7.25 percent unsecured 10-year notes due
August 13, 2006. The 7-year notes were sold at 99.107 percent of par and the
10-year notes were sold at 98.166 percent of par. Net proceeds to the Trust
after deducting underwriting expenses were $97.6 million. The 7-year notes bear
an effective interest rate of 7.46 percent, and the 10-year notes bear an
effective interest rate of 7.49 percent, for a combined effective interest rate
of 7.47 percent. WRIT used the proceeds of these notes to repay advances on its
lines of credit and to finance acquisitions and capital improvements to its
properties.
10
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
On February 20, 1998, WRIT sold $50 million of 7.25 percent unsecured notes due
February 25, 2028 at 98.653 percent to yield approximately 7.36 percent. WRIT
also sold $60 million in unsecured Mandatory Par Put Remarketed Securities
("MOPPRS") at an effective borrowing rate through the remarketing date (February
2008) of approximately 6.74 percent. The net proceeds to WRIT after deducting
loan origination fees was $102.7 million. WRIT used the proceeds of these notes
for general business purposes, including repayment of outstanding advances under
its lines of credit and to finance acquisitions and capital improvements to its
properties. WRIT's costs of the borrowings of approximately $7.2 million will
be amortized over the lives of the notes using the effective interest method.
On November 6, 2000, WRIT sold $55.0 million of 7.78 percent unsecured notes due
November 2004. The notes bear an effective interest rate of 7.89 percent.
Total proceeds to the Trust, net of underwriting fees, were $54.8 million. WRIT
used the proceeds of these notes to repay advances on its lines of credit.
These notes contain certain financial and non-financial covenants, all of which
WRIT has met as of September 30, 2001.
NOTE 7: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Centers,
Multifamily Properties and Retail Centers. Office Buildings represent 56
percent of real estate rental revenue and provide office space for various types
of businesses. Industrial Centers represent 13 percent of real estate rental
revenue and are used for warehousing and distribution. Multifamily Properties
represent 19 percent of real estate rental revenue and provide housing for
families throughout the Washington Metropolitan area. Retail Centers represent
the remaining 12 percent of real estate rental revenue and are typically
neighborhood grocery store or drug store anchored retail centers.
The accounting policies of each of the segments are the same as those described
in Note 2. WRIT evaluates performance based upon operating income from the
combined properties in each segment. WRIT's reportable segments are
consolidations of similar properties. They are managed separately because each
segment requires different operating, pricing and leasing strategies. All of
these properties have been acquired separately and are incorporated into the
applicable segment.
11
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(in thousands)
--------------
Three Months Ended September 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------
Office Industrial Retail Corporate and
Buildings Centers Multifamily Centers Other Consolidated
----------------------------------------------------------------------------------------------
Real estate rental revenue $ 21,278 $ 4,968 $ 7,016 $ 4,611 $ - $ 37,873
Real estate expenses (6,401) (1,013) (2,459) (940) - (10,813)
----------------------------------------------------------------------------------------------
Operating income 14,877 3,955 4,557 3,671 - 27,060
Depreciation and amortization (3,939) (1,015) (956) (580) (310) (6,800)
----------------------------------------------------------------------------------------------
Income from real estate 10,938 2,940 3,601 3,091 (310) 20,260
Other income - - - - 302 302
Interest expense (398) - (1,078) (155) (5,100) (6,731)
General and administrative - - - - (1,303) (1,303)
----------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate 10,540 2,940 2,522 2,936 (6,411) 12,528
Gain on Sale of Real Estate 4,296 - - - - 4,296
----------------------------------------------------------------------------------------------
Net Income $ 14,836 $ 2,940 $ 2,522 $ 2,936 $(6,411) $ 16,824
==============================================================================================
Capital investments $ 1,917 $ 421 $ 766 $ 381 $ 141 $ 3,626
==============================================================================================
Total assets $381,131 $106,500 $80,228 $81,749 $45,193 $694,801
==============================================================================================
(in thousands)
--------------
Three Months Ended September 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------
Office Industrial Retail Corporate and
Buildings Centers Multifamily Centers Other Consolidated
----------------------------------------------------------------------------------------------
Real estate rental revenue $ 18,075 $ 5,129 $ 6,585 $ 4,441 $ - $ 34,230
Real estate expenses (5,466) (960) (2,389) (861) - (9,676)
----------------------------------------------------------------------------------------------
Operating income 12,609 4,169 4,196 3,580 - 24,554
Depreciation and amortization (3,345) (976) (892) (597) - (5,810)
----------------------------------------------------------------------------------------------
Income from real estate 9,264 3,193 3,304 2,983 - 18,744
Other income - - - - 288 288
Interest expense (407) - (1,082) (160) (4,745) (6,394)
General and administrative - - - - (1,914) (1,914)
----------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate 8,857 3,193 2,222 2,823 (6,371) 10,724
Gain on Sale of Real Estate - - - 2,069 - 2,069
----------------------------------------------------------------------------------------------
Net Income $ 8,857 $ 3,193 $ 2,222 $ 4,892 $(6,371) $ 12,793
==============================================================================================
Capital investments $ 9,358 $ 1,636 $ 1,149 $ 472 $ 118 $ 12,733
==============================================================================================
Total assets $326,825 $107,373 $80,266 $82,310 $17,436 $614,210
==============================================================================================
12
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(in thousands)
--------------
Nine Months Ended September 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------
Office Industrial Retail Corporate and
Buildings Centers Multifamily Centers Other Consolidated
----------------------------------------------------------------------------------------------
Real estate rental revenue $ 60,507 $15,400 $20,512 $14,199 $ - $110,618
Real estate expenses (18,038) (3,448) (7,309) (3,010) - (31,805)
----------------------------------------------------------------------------------------------
Operating income 42,469 11,952 13,203 11,189 - 78,813
Depreciation and amortization (11,246) (3,059) (2,849) (1,746) (794) (19,694)
----------------------------------------------------------------------------------------------
Income from real estate 31,223 8,893 10,354 9,443 (794) 59,119
Other income - - - - 1,251 1,251
Interest expense (1,135) - (3,238) (468) (15,338) (20,178)
General and administrative - - - - (4,541) (4,541)
----------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate 30,089 8,893 7,116 8,975 (19,422) 35,651
Gain on Sale of Real Estate 4,296 - - - - 4,296
----------------------------------------------------------------------------------------------
Net Income $ 34,385 $ 8,893 $ 7,116 $ 8,975 $(19,422) $ 39,947
==============================================================================================
Capital investments $ 49,713 $ 1,614 $ 2,995 $ 542 $ 212 $ 55,076
==============================================================================================
(in thousands)
--------------
Nine Months Ended September 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------
Office Industrial Retail Corporate and
Buildings Centers Multifamily Centers Other Consolidated
----------------------------------------------------------------------------------------------
Real estate rental revenue $ 52,169 $14,343 $19,448 $13,560 $ - $ 99,520
Real estate expenses (15,673) (2,973) (7,151) (2,882) - (28,679)
----------------------------------------------------------------------------------------------
Operating income 36,496 11,370 12,297 10,678 - 70,841
Depreciation and amortization (9,619) (2,851) (2,596) (1,823) - (16,889)
----------------------------------------------------------------------------------------------
Income from real estate 26,877 8,519 9,701 8,855 - 53,952
Other income - - - - 679 679
Interest expense (1,159) - (3,248) (480) (13,909) (18,796)
General and administrative - - - - (5,757) (5,757)
----------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate 25,718 8,519 6,453 8,375 (18,987) 30,078
Gain on Sale of Real Estate - - - 3,567 - 3,567
----------------------------------------------------------------------------------------------
Net Income $ 25,718 $ 8,519 $ 6,453 $11,942 $(18,987) $ 33,645
==============================================================================================
Capital investments $ 13,138 $ 3,454 $ 2,751 $ 2,378 $ 281 $ 22,002
==============================================================================================
NOTE 8: SUBSEQUENT EVENT
- ------------------------
On November 1, 2001, WRIT acquired Sullyfield Commerce Center for a purchase
price of $21.6 million. The purchase price of $21.6 million was all cash
subject to the assumption of the existing mortgage of $8,535,141 bearing
interest at 9% and maturing January 1, 2007.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
FORWARD LOOKING STATEMENTS
- --------------------------
WRIT's Management's Discussion and Analysis of Financial Condition and Results
of Operations contains statements that may be considered forward looking.
Although WRIT believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Factors that could cause actual results to
differ materially from WRIT's current expectations include the economic health
of WRIT's tenants, the economic health of the Greater Washington-Baltimore
region or other markets WRIT may enter, the supply of competing properties,
inflation, consumer confidence, unemployment rates, consumer tastes and
preferences, stock price and interest rate fluctuations, WRIT's future capital
requirements, compliance with applicable laws, including those concerning the
environment and access by persons with disabilities, and weather conditions.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Three Months Ended September
- -----------------------------------------------------------------------------
30, 2001 Compared to the Three Months Ended September 30, 2000
- --------------------------------------------------------------
Total revenues for the third quarter of 2001 increased 10.6% ($3.6 million) to
$37.9 million from $34.2 million in the third quarter of 2000. Operating income
increased 10.2% ($2.5 million) to $27.1 million from $24.6 million in the third
quarter of 2000.
For the third quarter of 2001, WRIT's office buildings had increases of 17.7% in
revenues and 18.0% in operating income, over the third quarter of 2000. These
increases were primarily due to the acquisition of Courthouse Square in October
2000, the acquisition of One Central Plaza in April 2001 and increased core
portfolio operating income. Comparing those office buildings owned by WRIT for
the entire third quarter of 2000 and 2001, revenue and operating income
increased 3.0% and 4.2%, respectively. These increases in revenues and
operating income were primarily due to increases in rental rates and tenant pass
through expense recoveries across the sector. This operating income increase
was partially offset by an increase of $0.9 million (17.1%) in real estate
expenses during third quarter 2000. Occupancy levels were relatively unchanged,
decreasing slightly to 96.9% in third quarter 2001 from 97.1% in third quarter
2000.
For the third quarter of 2001, WRIT's industrial distribution center revenues
and operating income decreased 3.1% and 5.1%, respectively, over the third
quarter of 2000. Rental rates increased 4.8% for the sector, but were partially
offset by decreased tenant pass through recoveries. Occupancy rates improved to
98.9% in the third quarter of 2001 from 96.5% in the third quarter of 2000.
Operating income was partially offset by a $0.05 million (5.5%) increase in real
estate expenses during third quarter 2001.
For the third quarter of 2001, WRIT's multifamily revenues and operating income
increased 6.6% and 8.6%, respectively, over the third quarter of 2000. These
increases were primarily due to increased rental rates in WRIT's core portfolio.
Occupancy rates decreased slightly from 97.5% in the third quarter of 2000 to
96.4% in the third quarter of 2001. Operating income was partially offset by a
$0.07 million (2.9%) increase in real estate expenses during third quarter 2001.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the third quarter of 2001, WRIT's retail center revenues and operating
income increased 3.8% and 2.5%, respectively, over the third quarter of 2000.
These increases were primarily due to increased core portfolio revenues and
operating income, offset by the August 2000 sale of Clairmont Center. Comparing
those shopping centers owned by WRIT for the entire third quarter of 2000 and
2001, revenue and operating income increased by 5.7% and 5.9%, respectively.
These increases were primarily due to increased rental rates. Occupancy rates
were relatively unchanged from 95.0% in the third quarter of 2000 to 95.3% in
the third quarter of 2001. Operating income was partially offset by a $0.08
million (9.2%) increase in real estate expenses during third quarter 2001.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2001 Compared to the Nine Months Ended September 30, 2000
- ---------------------------------------------------------
Total revenues for the first nine months of 2001 increased 11.2% ($11.1 million)
to $110.6 million from $99.5 million for the first nine months of 2000.
Operating income increased 11.3% ($8.0 million) to $78.8 million for the first
nine months of 2001 from $70.8 million for the first nine months of 2000.
For the first nine months of 2001, WRIT's office buildings had increases of
16.0% in revenues and 16.4% in operating income, over the first nine months of
2000. These increases were primarily due to the acquisitions of Wayne Plaza in
May 2000, Courthouse Square in October 2000, One Central Plaza in April 2001 and
increased core portfolio operating income. Comparing those office buildings
owned by WRIT for the entire first nine months of 2000 and 2001, revenue and
operating income increased 5.5% and 6.3%, respectively. These increases in
revenues and operating income were primarily due to increases in rental rates
and occupancy levels. Operating income was partially offset by an increase of
$2.4 million (15.1%) in real estate expenses in the first nine months of 2001.
For the first nine months of 2001, WRIT's industrial distribution center
revenues and operating income increased 7.4% and 6.1%, respectively, over the
first nine months of 2000. This was primarily due to increased core portfolio
operating income and increased occupancy. Operating income was partially offset
by an increase of $0.5 million (16.0%) in real estate expenses in the first nine
months of 2001.
For the first nine months of 2001, WRIT's multifamily revenues and operating
income increased 5.5% and 7.4%, respectively, over the first nine months of
2000. These increases were primarily due to increased rental and occupancy
rates. Operating income was partially offset by an increase of $0.2 million
(2.2%) in real estate expenses in the first nine months of 2001.
For the first nine months of 2001, WRIT's retail center revenues and operating
income increased 4.7% and 4.8%, respectively, over the first nine months of
2000. The increases in revenue and operating income were primarily due to
increased core portfolio revenues, offset by the sale of Prince William Plaza in
February 2000 and the sale of Clairmont Center in August 2000. Comparing those
shopping centers owned by WRIT for the entire first nine months of 2000 and
2001, revenue and operating income increased by 7.9% and 8.9%, respectively.
These increases were primarily due to increased rental rates and increased
tenant pass through expense recoveries. Operating income was partially offset
by a $0.1 million increase (4.5%) in real estate expenses in the first nine
months of 2001.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended September
- --------------------------------------------------------------------------------
30, 2001 Compared to the Three Months Ended September 30, 2000
- --------------------------------------------------------------
Real estate expenses increased $1.1 million or 11.8% to $10.8 million for the
third quarter of 2001 as compared to $9.7 million for the third quarter of 2000.
This increase was primarily due to expenses relating to $26.5 million of
properties acquired in 2000, $46.1 million of properties acquired in 2001,
higher real estate taxes and a 2.0% increase in core portfolio operating
expense, partially offset by the impact of the $6.2 million of properties sold
throughout 2000.
Depreciation and amortization expense increased $1.0 million or 17.0% to $6.8
million for the third quarter of 2001 as compared to $5.8 million for the third
quarter of 2000. This was primarily due to the impact of $26.6 million of
acquisitions throughout 2000, $46.1 million of properties acquired in 2001 and
2000 and 2001 capital and tenant improvement expenditures, which totaled $16.3
million and $8.8 million, respectively. This amount was partially offset by
property dispositions of $6.2 million throughout 2000.
Total interest expense increased $0.3 million or 5.3% to $6.7 million for the
third quarter of 2001 as compared to $6.4 million for the third quarter of 2000.
This increase was primarily attributable to the issuance of $55.0 million of
medium term notes in November 2000, net of interest savings on the line of
credit borrowings paid off with the proceeds of these notes. For the third
quarter of 2001, notes payable interest expense was $5.0 million, mortgage
interest expense was $1.6 million and lines of credit interest expense was $0.1
million. For the third quarter of 2000, notes payable interest expense was $3.9
million, mortgage interest expense was $1.6 million and lines of credit interest
expense was $0.8 million.
General and administrative expenses decreased $0.6 million or 31.9% to $1.3
million for the third quarter of 2001 as compared to $1.9 million for the third
quarter of 2000. The change was primarily attributable to increased property
management profits that in turn reduce the administrative expenses of the Trust
and decreased incentive compensation. For the third quarter of 2001, general and
administrative expenses as a percentage of revenue were 3.4% as compared to 5.6%
for the third quarter of 2000.
Gain on sale of real estate for the three months ended September 30, 2001 was
$4.3 million, resulting from the sale of 10400 Connecticut Avenue. Gain on sale
of real estate for the three months ended September 30, 2000 was $2.1 million,
resulting from the sale of Clairmont Center and the Westminster parcel.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Nine Months Ended September
- -------------------------------------------------------------------------------
30, 2001 Compared to the Nine Months Ended September 30, 2000
- -------------------------------------------------------------
Real estate expenses increased $3.1 million or 10.9% to $31.8 million for the
first nine months of 2001 as compared to $28.7 million for the first nine months
of 2000. This increase was primarily due to expenses relating to properties
acquired in 2000 and 2001, partially offset by 2000 dispositions, as well as
increased core portfolio utilities, real estate taxes, management fees, repairs
and maintenance and operating services and supplies expenses in 2001 as compared
to 2000.
Depreciation and amortization expense increased $2.8 million or 16.6% to $19.7
million for the first nine months of 2001 as compared to $16.9 million for the
first nine months of 2000. This was primarily due to 2000 and year to date 2001
acquisitions of $26.5 million and $46.0 million, respectively, and 2000 and year
to date 2001 capital and
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
tenant improvement expenditures which totaled $16.3 million and $8.8 million,
respectively.
Total interest expense was increased $1.4 million or 7.4% to $20.2 million for
the first nine months of 2001 as compared to $18.8 million for the first nine
months of 2000. This increase was primarily attributable to the issuance of
$55.0 million of medium term notes in November 2000, net of interest savings on
the line of credit borrowings paid off with the proceeds of these notes. For
the first nine months of 2001, notes payable interest expense was $15.1 million,
mortgage interest expense was $4.8 million and lines of credit interest expense
was $0.2 million. For the first nine months of 2000, notes payable interest
expense was $11.8 million, mortgage interest expense was $4.9 million and lines
of credit interest expense was $2.1 million.
General and administrative expenses decreased $1.2 million or 21.1% to $4.5
million for the first nine months of 2001 as compared to $5.7 million for the
first nine months of 2000. The change was primarily attributable to increased
property management profits that in turn reduce the administrative expenses of
the Trust and decreased incentive compensation. For the first nine months of
2001, general and administrative expenses as a percentage of revenue were 4.1%
as compared to 5.8% for the first nine months of 2000.
Gain on sale of real estate for the nine months ended September 30, 2001 was
$4.3 million, resulting from the sale of 10400 Connecticut Avenue. Gain on sale
of real estate for the nine months ended September 30, 2000 was $3.6 million,
resulting from the sale of Prince William Plaza, Clairmont Center and the
Westminster parcel.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
WRIT has utilized the proceeds of share offerings, medium and long-term fixed
interest rate debt, bank lines of credit and cash flow from operations for its
capital needs. External sources of capital are available to WRIT from its
existing unsecured credit commitments and management believes that additional
sources of capital are available from the sale of additional shares, the sale of
medium or long-term notes, the sale of property and/or through secured
financing. The funds raised would be used to pay off any outstanding advances
on the Trust's lines of credit and/or for new acquisitions and capital
improvements.
WRIT anticipates that over the near term, interest rate fluctuations will not
have a material effect on earnings. WRIT's long-term fixed-rate notes payable
have maturities ranging from August 2003 through February 2028 (see Note 6).
None of the $350.6 million total debt outstanding at September 30, 2001 was at a
floating rate.
WRIT has line of credit commitments in place from commercial banks for up to $75
million which bear interest at an adjustable spread over LIBOR based on the
Trust's interest coverage ratio and public debt rating. As of September 30,
2001, WRIT had $0 outstanding under its lines of credit. WRIT acquired three
improved properties and the land under Munson Hill Towers in 2000 and two
properties in 2001 (as of September 30) for total acquisition costs of $26.6
million and $46.1 million, respectively. The 2000 acquisitions were financed
through line of credit advances and the use of the proceeds from the property
sales in February 2000 and August 2000. The 2001 acquisitions were funded
through income from operations, line of credit advances and proceeds of public
offering in April 2001.
Cash flow from operating activities totaled $51.5 million for the first nine
months of 2001, as a result of net income before gain on sale of real estate of
$35.7 million, depreciation and amortization of $19.7 million, increases in
other assets of $3.3 million and decreases in liabilities (other than mortgage
note, senior notes and lines of credit
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
payable) of $0.5 million. The majority of the increase in cash flow from
operating activities was primarily due to a larger property portfolio, increased
rental rates and increased occupancies.
Net cash used in investing activities for the first nine months of 2001 was
$47.0 million, including real estate acquisitions of $46.1 million, capital
improvements to real estate of $8.8 million and non-real estate investments of
$0.2 million, offset by cash received from sale of real estate properties of
$8.1 million.
Net cash provided by financing activities for the first nine months of 2001 was
$22.0 million, including share offering proceeds of $53.1 million, share option
exercises of $6.3 million, principal repayments on the mortgage notes payable of
$0.6 million and $36.8 million in dividends paid. Rental revenue has been the
principal source of funds to pay WRIT's operating expenses, interest expense and
dividends to shareholders.
Management believes that WRIT has the liquidity and the capital resources
necessary to meet all of its known obligations and to make additional property
acquisitions and capital improvements when appropriate to enhance long-term
growth.
RATIOS OF EARNINGS TO FIXED CHARGES AND DEBT SERVICE COVERAGE
- -------------------------------------------------------------
The following table sets forth the Trust's ratios of earnings to fixed charges
and debt service coverage for the periods shown:
Nine months ended
September 30, Year Ended December 31,
2001 2000 1999 1998
---- ---- ---- ----
Earnings to fixed charges 2.77x 2.63x 2.61x 3.01x
Debt service coverage 3.60x 3.40x 3.42x 3.84x
The ratio of earnings to fixed charges is computed by dividing earnings by fixed
charges. For this purpose, earnings consist of income from continuing
operations plus fixed charges. Fixed charges consist of interest expense,
including interest costs capitalized, and the amortized costs of debt issuance.
Debt service coverage is computed by dividing income before (a) gain on sale of
real estate; (b) interest income; (c) interest expense; and (d) depreciation and
amortization by the sum of interest expense, including interest costs
capitalized, and the amortized costs of debt issuance plus mortgage principal
amortization.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT FINANCIAL MARKET RISK
- --------------------------------------------------------------------
The principal material financial market risk to which WRIT is exposed is
interest rate risk. WRIT's exposure to market risk for changes in interest
rates relates primarily to refinancing long-term fixed rate obligations, the
opportunity cost of fixed rate obligations in a falling interest rate
environment and its variable rate lines of credit.
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
WRIT primarily enters into debt obligations to support general corporate
purposes including acquisition of real estate properties, capital improvements
and working capital needs. In the past, WRIT has used interest rate hedge
agreements to hedge against rising interest rates in anticipation of refinancing
or new debt issuance.
WRIT's interest rate risk has not changed significantly from its risk as
disclosed in its 2000 Form 10-K.
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(12) Computation of Ratios
(b) Reports on Form 8-K
1. July 19, 2001 - Report pursuant to Item 5 on the release of
the Trust's June 30, 2001 earnings information.
2. November 5, 2001 - Report pursuant to Item 5 on the release of
the Trust's September 30, 2001 earnings information.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON REAL ESTATE INVESTMENT TRUST
/s/ Laura M. Franklin
________________________________________________
Laura M. Franklin,
Vice President, Managing Director,
Accounting, Administration and
Corporate Secretary
Date: November 14, 2001
21