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, 1999 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 incorporation (IRS Employer Identification
or organization) Number)
6110 EXECUTIVE BOULEVARD, ROCKVILLE, MARYLAND 20852
(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)
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 35,721,494
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
------ ------
1
WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
Page
----
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 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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, 1998 included in the Trust's 1998 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,
1999 1998
Assets
Real estate at cost $ 654,049 $ 598,874
Accumulated depreciation (78,114) (68,301)
--------- ---------
Total investment in real estate 575,980 530,573
Cash and temporary investments 1,936 4,595
Rents and other receivables, net of allowance
for doubtful accounts of $914 and $821,
respectively 4,224 4,130
Prepaid expenses and other assets 20,082 19,409
--------- ---------
$ 602,222 $ 558,707
========= =========
Liabilities
Accounts payable and other liabilities $ 9,639 $ 13,524
Tenant security deposits 5,050 4,331
Advance rents 2,522 2,680
Mortgage notes payable 87,208 28,912
Lines of credit payable 29,000 44,000
Notes payable 210,000 210,000
--------- ---------
343,419 303,447
--------- ---------
Minority interest 1,517 1,527
--------- ---------
Shareholders' Equity
Shares of beneficial interest $0.01 par value
100,000,000 shares authorized: 35,721 and 35,692
shares issued and outstanding at September 30,
1999 and December 31, 1998, respectively 357 357
Additional paid-in capital 256,929 253,376
--------- ---------
257,286 253,733
--------- ---------
$ 602,222 $ 558,707
========= =========
See accompanying notes to financial statements
3
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Real estate rental revenue $ 29,566 $ 26,243 $ 86,084 $ 76,157
Real estate expenses (8,985) (8,288) (26,085) (23,232)
------------ ------------ ------------ ------------
Operating income 20,581 17,955 59,999 52,925
Depreciation and amortization (4,805) (3,889) (13,900) (11,272)
------------ ------------ ------------ ------------
Income from real estate 15,776 14,066 46,099 41,653
Other income 84 165 521 712
Interest expense (5,463) (4,469) (16,070) (12,484)
General and administrative (1,571) (1,485) (4,510) (4,663)
------------ ------------ ------------ ------------
Income before gain on sale of real
estate 8,826 8,277 26,040 25,218
------------ ------------ ------------ ------------
Gain on sale of real estate -- -- 7,909 5,927
------------ ------------ ------------ ------------
Net Income $ 8,826 $ 8,277 $ 33,949 $ 31,145
============ ============ ============ ============
Per Share information based on the
weighted average number
of shares outstanding
Shares- Basic 35,716 35,692 35,711 35,687
Shares- Diluted 35,721 35,798 35,728 35,798
Net income per share- Basic $ 0.25 $ 0.23 $ 0.95 $ 0.87
============ ============ ============ ============
Net income per share- Diluted $ 0.25 $ 0.23 $ 0.95 $ 0.87
============ ============ ============ ============
Dividends paid $ 0.29 $ 0.28 $ 0.87 $ 0.83
============ ============ ============ ============
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, 1999
(Unaudited)
(In Thousands)
Additional Shareholders'
Shares Par Value Paid in Capital Equity
--------------- --------------- --------------- ---------------
Balance, December 31, 1998 35,692 $ 357 $253,376 $253,733
Net Income 33,949 33,949
Dividends (30,892) (30,892)
Share Options Exercised 29 0 496 496
------- ------- ------- -------
Balance, September 30,1999 35,721 $ 357 $256,929 $257,286
======= ======= ======= =======
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,
1999 1998
-------- --------
Cash Flow From Operating Activities
Net Income $ 33,949 $ 31,144
Adjustments to reconcile net income
to net cash provided by operating
activities
Gain on sale of real estate (7,909) (5,926)
Depreciation and amortization 13,900 11,272
Changes in other assets (1,459) (1,585)
Changes in other liabilities (3,333) 1,685
-------- --------
Net cash provided by operating activities 35,148 36,590
-------- --------
Cash Flow From Investing Activities
Capital improvements to real estate (15,359) (11,780)
Non-real estate capital improvements (227) (1,040)
Real estate acquistions (48,434) (45,375)
Cash received for sale of real estate 22,033 9,239
-------- --------
Net cash used in investing activities (41,987) (48,956)
-------- --------
Cash Flow From Financing Activities
Dividends paid (30,892) (29,620)
Net proceeds from debt offering -- 102,797
Borrowing- Lines of credit 29,000 30,000
Repayments- Lines of credit (44,000) (95,250)
Proceeds from Mortgage note payable 50,000 --
Principal payments- Mortgage note payable (424) (104)
Share options exercised 496 195
-------- --------
Net cash provided by financing activities 4,180 8,018
-------- --------
Net decrease in cash and temporary
investments (2,659) (4,348)
Cash and temporary investments at beginning
of year 4,595 7,908
-------- --------
Cash and temporary investments at end of
period $ 1,936 $ 3,560
======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest during the nine
months ended September 30, 1999 $ 18,968 $ 11,905
======== ========
Supplemental schedule of non-cash investing and financing activities:
- ---------------------------------------------------------------------
On September 20, 1999, WRIT purchased Avondale Apartments for an acquisition
cost of $13.0 million. WRIT assumed a mortgage in the amount of $8.7 million and
paid the balance in cash. The $8.7 million of assumed mortgage is not included
in the $48.4 million amount shown as real estate acquisitions.
See accompanying notes to financial statements
6
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (Unaudited)
NOTE 1: NATURE OF BUSINESS
- --------------------------
Washington Real Estate Investment Trust ("WRIT") is a self-administered
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 95% of
its taxable income to its shareholders each year, 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, 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 embedded in
other contracts (collectively referred
7
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (Unaudited)
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 June 15, 2000. Although WRIT currently has no
derivative instruments that this statement would apply to, it could affect
certain derivative instruments acquired by WRIT in future periods.
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 from
its residential and commercial leases when earned and accounts for all rental
abatements on a straight-line basis.
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. Effective January 1, 1995, WRIT revised its estimate of
useful lives for major capital improvements to real estate. 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 using the straight-line method over 5 years or the term of the
lease if it differs significantly from 5 years. Capital improvements placed in
service prior to January 1, 1995 will continue to be depreciated on a
straight-line basis over their previously estimated useful lives not exceeding
30 years. 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. No such losses have been recorded during 1999 or 1998.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include cash equivalents with original maturities
of 90 days or less.
8
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (Unaudited)
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,
1999
(In Thousands)
--------------
Office buildings $346,331
Industrial distribution centers 112,822
Apartment buildings 98,443
Shopping centers 96,498
----------
$654,094
----------
As of September 30, WRIT acquired the following properties during 1999:
Acquisition Date Property Property Rentable Square Feet Acquisition Cost
Name Type (in thousands)
- --------------------------------------------------------------- ---------------------------------------------------------------
January 27, 1999 Dulles South IV Industrial 83,000 $ 6,909
April 16, 1999 Sully Square Industrial 95,000 $ 7,557
May 21, 1999 600 Jefferson Plaza Office 115,000 $14,472
May 21, 1999 1700 Research Boulevard Office 103,000 $12,941
September 10, 1999 North American Vaccine Industrial 31,000 $ 2,231
September 20, 1999 Avondale Residential 260,000*/237 units $13,043
---------------------- --------------------
Total 687,000 $57,153
====================== ====================
* Apartment buildings are presented in gross square feet.
NOTE 4: MORTGAGE NOTES PAYABLE
- -------------------------------
On September 20, 1999, WRIT assumed a $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. On
9
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (Unaudited)
September 27, 1999, WRIT closed on a $50.0 million mortgage note payable of
which the proceeds were used to pay down WRIT's lines of credit. The
mortgage is secured by five of WRIT's Virginia residential properties. The
mortgage bears interest at a fixed 7.14 percent per annum. Interest only is
payable monthly until October 1, 2009, at which time all unpaid principal and
interest are payable in full. Annual maturities of principal as of September 30,
1999 are as follows:
(In Thousands)
1999 $ 178
2000 768
2001 833
2002 902
2003 7,376
Thereafter 77,151
--------------------
Total $ 87,208
====================
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
- -----------------------------------------
As of September 30, 1999, WRIT had two unsecured credit commitments in the
amount of $50 million and $25 million. As of September 30, 1999, $29 million was
outstanding under the credit commitments leaving $46 million available. Under
the terms of the credit commitments, interest only is payable monthly, in
arrears, on the unpaid principal balance. Amounts outstanding under the credit
commitments during the nine months ended September 30, 1999 bore interest at
rates ranging from 5.98% to 6.64% per annum. 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 subject to a yield maintenance
obligation.
The $50 million credit commitment requires WRIT to pay the lender unused
commitment fees at the rate of 0.200% 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% 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, and
non-financial covenants which WRIT has met as of September 30, 1999.
NOTE 6: NOTES PAYABLE
- ---------------------
On August 13, 1996 WRIT sold $50 million of 7.125% 7-year unsecured notes due
August 13, 2003, and $50 million of 7.25% unsecured 10-year notes due August 13,
2006. The 7-year notes were sold at 99.107% of par and the 10-year notes were
sold at 98.166% 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%, and the 10 year notes bear an effective interest rate of 7.49%, for a
combined effective interest rate of 7.47%. WRIT used the proceeds of these notes
to pay down 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, 1999 (Unaudited)
On February 20, 1998, WRIT sold $50 million of 7.25% unsecured notes due
February 25, 2028 at 98.653% to yield approximately 7.36%. 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%. 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.
These notes contain certain financial and non-financial covenants which WRIT has
met as of September 30, 1999.
NOTE 7: SALE OF REAL ESTATE
- ---------------------------
On February 8, 1999, WRIT sold two office buildings, 444 N. Frederick Road and
Arlington Financial Center and one industrial distribution facility, Department
of Commerce. The properties were sold for approximately $21.5 million in cash
resulting in a gain of approximately $7.8 million. On February 26, 1999, WRIT
sold the V Street Distribution Center for $0.6 million in cash resulting in a
gain of approximately $0.1 million. WRIT used the proceeds from these sales
towards the purchase of Sully Square industrial property and 600 Jefferson Plaza
and 1700 Research Boulevard office properties, thereby deferring income taxes
related to the taxable gain on the sale.
NOTE 8: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Distribution
Centers, Apartment Buildings and Shopping Centers. Office Buildings represent
51% of real estate rental revenue and provide office space for various types of
businesses. Industrial Distribution Centers represent 14% of real estate rental
revenue and are used for warehousing and distribution. Apartment Buildings
represent 19% of real estate rental revenue. These properties provide housing
for families throughout the Washington Metropolitan area. Shopping Centers
represent the remaining 16% of real estate rental revenue and are typically
grocery store or drug store anchored centers and retail outlets for a variety of
stores.
The accounting policies 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, 1999 (Unaudited)
(IN THOUSANDS)
--------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
Office Industrial Apartment Shopping Corporate and
Buildings Centers Buildings Centers Other Consolidated
-------------------------------------------------------------------------------------------------
Real estate rental revenue $15,450 $4,049 $5,736 $4,331 $- $29,566
Real estate expenses 4,991 816 2,234 944 - 8,985
-----------------------------------------------------------------------------------------------
Operating income 10,459 3,233 3,502 3,387 - 20,581
Depreciation and amortization 2,754 819 663 569 - 4,805
-----------------------------------------------------------------------------------------------
Income from real estate 7,705 2,414 2,839 2,818 - 15,776
Other income - - - - 84 84
Interest expense (411) - (61) (163) (4,828) (5,463)
General and administrative - - - - (1,571) (1,571)
===============================================================================================
Net income before gain on sale
of real estate $7,294 $2,414 $2,778 $2,655 $(6,315) $8,826
===============================================================================================
Capital investments $4,853 $2,941 $13,926 $389 $81 $22,190
===============================================================================================
Total assets $316,511 $105,031 $80,155 $83,576 $16,949 $602,222
===============================================================================================
(IN THOUSANDS)
--------------
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
Office Industrial Apartment Shopping Corporate and
Buildings Centers Buildings Centers Other Consolidated
-----------------------------------------------------------------------------------------------
Real estate rental revenue $12,710 $3,692 $5,270 $4,571 $- $26,243
Real estate expenses 4,349 711 2,236 992 - 8,288
-----------------------------------------------------------------------------------------------
Operating income 8,361 2,981 3,034 3,579 - 17,955
Depreciation and amortization 2,052 658 645 534 - 3,889
-----------------------------------------------------------------------------------------------
Income from real estate 6,309 2,323 2,389 3,045 - 14,066
Other income - - - - 165 165
Interest expense - - - (166) (4,303) (4,469)
General and administrative - - - - (1,485) (1,485)
===============================================================================================
Net income before gain on sale
of real estate $6,309 $2,323 $2,389 $2,879 $(5,623) $8,277
===============================================================================================
Capital investments $10,717 $2,108 $717 $375 $720 $14,637
===============================================================================================
12
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (Unaudited)
(IN THOUSANDS)
--------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------
Office Industrial Apartment Shopping Corporate and
Buildings Centers Buildings Centers Other Consolidated
-----------------------------------------------------------------------------------------------
Real estate rental revenue $44,297 $11,791 $16,622 $13,374 $- $86,084
Real estate expenses 14,099 2,584 6,373 3,029 - 26,085
-----------------------------------------------------------------------------------------------
Operating income 30,198 9,207 10,249 10,345 - 59,999
Depreciation and amortization 7,878 2,379 1,980 1,663 - 13,900
-----------------------------------------------------------------------------------------------
Income from real estate 22,320 6,828 8,269 8,682 - 46,099
Other income - - - - 521 521
Interest expense (1,238) - (61) (491) (14,280) (16,070)
General and administrative - - - - (4,510) (4,510)
===============================================================================================
Net income before gain on sale
of real estate $21,082 $6,828 $8,208 $8,191 $(18,269) $26,040
===============================================================================================
Capital investments $37,024 $18,767 $6,465 $1,537 $ 227 $64,020
===============================================================================================
(IN THOUSANDS)
--------------
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
Office Industrial Apartment Shopping Corporate and
Buildings Centers Buildings Centers Other Consolidated
-----------------------------------------------------------------------------------------------
Real estate rental revenue $37,627 $9,809 $15,719 $13,002 $- $76,157
Real estate expenses 12,445 1,923 6,153 2,711 - 23,232
-----------------------------------------------------------------------------------------------
Operating income 25,182 7,886 9,566 10,291 - 52,925
Depreciation and amortization 6,162 1,660 1,928 1,522 - 11,272
-----------------------------------------------------------------------------------------------
Income from real estate 19,020 6,226 7,638 8,769 - 41,653
Other income - - - - 712 712
Interest expense - - - (500) (11,984) (12,484)
General and administrative - - - - (4,663) (4,663)
===============================================================================================
Net income before gain on sale
of real estate $19,020 $6,226 $7,638 $8,269 $(15,935) $25,218
===============================================================================================
Capital investments $15,985 $32,007 $1,814 $7,349 $1,040 $58,195
===============================================================================================
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 general economic
conditions, local real estate conditions, the performance of properties that
WRIT has acquired or may acquire and other risks, detailed from time to time in
WRIT's past and future SEC reports.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Three Months Ended September
30, 1999 Compared to the Three Months Ended September 30, 1998
Total revenues for the third quarter of 1999 increased 12.7% ($3.4 million) to
$29.6 million from $26.2 million in the third quarter of 1998. Operating income
increased 14.6% ($2.6 million) to $20.6 million from $18.0 million in the third
quarter of 1998.
For the third quarter of 1999, WRIT's office buildings had increases of 21.6% in
revenues and 25.1% in operating income, over the third quarter of 1998. These
increases were primarily due to the acquisitions of 8230 Boone Boulevard in
September 1998, Woodburn Medical Park in November 1998 and 600 Jefferson Plaza
and 1700 Research Boulevard in May 1999 and increased core portfolio operating
income offset in part by the sale of 444 N. Frederick and Arlington Financial
Center in February 1999, Comparing those office buildings owned by WRIT for the
entire third quarters of 1998 and 1999, revenue and operating income increased
3.9% and 6.0% 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 partially offset by a decrease in occupancy from
97.4% to 96.0%
For the third quarter of 1999, WRIT's industrial distribution center revenues
and operating income increased 9.7% and 8.5% respectively, over the third
quarter of 1998. This was primarily due to the acquisitions of 8900 Telegraph
Road in September 1998, Dulles South IV in January 1999, Sully Square in April
1999 and North American Vaccine in September 1999 offset in part by the sale of
Department of Commerce and V Street Distribution Center in February 1999, and
due to increased core portfolio operating income. Comparing those industrial
distribution centers owned by WRIT for the entire third quarters of 1998 and
1999, revenue and operating income increased by 4.5% and 3.4% respectively.
These increases in revenues and operating income were primarily due to increased
rental rates and occupancy.
For the third quarter of 1999, WRIT's apartment revenues and operating income
increased 8.8% and 15.4% respectively over the third quarter of 1998. These
increases were primarily due to increased rental and occupancy
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
rates as well as the acquisition of Avondale Apartments in September 1999.
Comparing those apartment buildings owned by WRIT for the entire third quarters
of 1998 and 1999, revenue and operating income increased by 7.6% and 13.8%
respectively. These increases in revenues and operating income were primarily
due to increased rental rates and occupancy.
For the third quarter of 1999, WRIT's shopping center revenues and operating
income decreased 5.3% and 5.4% respectively over the third quarter of 1998.
These decreases were primarily due to decreased tenant pass through expense
recoveries and the sale of Dover Mart in December 1998, offset by increased core
portfolio revenues and operating income. Comparing those shopping centers owned
by WRIT for the entire third quarters of 1998 and 1999, revenue and operating
income increased by 2.5% and 5.0% respectively. These increases were primarily
due to increased rental and occupancy rates, and increased real estate tax
recoveries.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Nine Months Ended September 30,
1999 Compared to the Nine Months Ended September 30, 1998
Total revenues for the first nine months of 1999 increased 13.0% ($9.9 million)
to $86.1 million from $76.2 million for the first nine months of 1998. Operating
income increased 13.4% ($7.1 million) to $60.0 million from $52.9 million in the
third quarter of 1998.
For the first nine months of 1999, WRIT's office buildings had increases of
17.7% in revenues and 19.9% in operating income, over the first nine months of
1998. These increases were primarily due to the acquisitions of 8230 Boone
Boulevard in September 1998, Woodburn Medical Park in November 1998 and 600
Jefferson Plaza and 1700 Research Boulevard in May 1999 offset in part by the
sale of 444 N. Frederick and Arlington Financial Center in February 1999, and
increased core portfolio operating income. Comparing those office buildings
owned by WRIT for the first nine months of 1998 and 1999, revenue and operating
income increased 7.7% and 9.8% respectively. These increases in revenues and
operating income were due to increases in rental rates, antenna rent and tenant
pass through expense recoveries across the sector.
For the first nine months of 1999, WRIT's industrial distribution center
revenues and operating income increased 20.2% and 16.8% respectively, over the
first nine months of 1998. This was primarily due to the acquisitions of
Northern Virginia Industrial Park in May 1998, 8900 Telegraph Road in September
1998, Dulles South IV in January 1999, Sully Square in April 1999 and North
American Vaccine in September 1999, offset in part by the sale of Department of
Commerce and V Street Distribution Center in February 1999, and due to increased
core portfolio operating income. Comparing those industrial distribution centers
owned by WRIT for the first nine months of 1998 and 1999, revenue increased by
3.1%. This increase in revenues were primarily due to increased rental rates.
For the first nine months of 1999, WRIT's apartment revenues and operating
income increased 5.7% and 7.1% respectively over the first nine months of 1998.
These increases were primarily due to increased rental and occupancy rates as
well as the acquisition of Avondale Apartments in September 1999.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the first nine months of 1999, WRIT's shopping center revenues and operating
income increased 2.9% and 1.0% respectively over the first nine months of 1998.
These increases were primarily due to the acquisition of 800 South Washington
Street in June 1998, offset in part by the sale of Dover Mart in December 1998,
and due to increased core portfolio revenues. Comparing those shopping centers
owned by WRIT for the first nine months of 1998 and 1999, revenue and operating
income decreased 4.4% and 6.3% respectively. The decreases were primarily due to
decreased occupancy, increased bad debt expense and decreased tenant pass
through expense recoveries.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended September
30, 1999 Compared to the Three Months Ended September 30, 1998
Real estate expenses increased $0.7 million or 8.4% to $9.0 million as compared
to $8.3 million for the third quarter of 1998. This increase is primarily due to
expenses relating to $139.5 million of properties acquired in 1998 and 1999
partially offset by the impact of the $34.5 million of properties sold in 1998
and 1999 and by a decrease of 0.3% in core portfolio operating expense.
Depreciation and amortization expense increased $0.9 million or 23.6% to $4.8
million as compared to $3.9 million for the third quarter of 1998. This is
primarily due to 1998 and year to date 1999 acquisitions of $57.2 million and
$82.3 million, respectively, and 1998 and year to date 1999 capital and tenant
improvement expenditures which totaled $11.8 million and $15.4 million,
respectively. The amount was partially offset by 1998 and year to date 1999
dispositions of $11.4 million and $23.1 million, respectively.
Total interest expense was $5.5 million for the third quarter of 1999 as
compared to $4.5 million for the third quarter of 1998. This increase is
primarily attributable to the assumption of $21.6 million in mortgages in
November 1998 in connection with the acquisition of Woodburn Medical Park,
the assumption of an $8.7 million mortgage in September 1999 in connection with
the acquisition of Avondale Apartments and an increased average balance
outstanding on the lines of credit in 1999 due to 1999 property acquisitions.
For the third quarter of 1999, notes payable interest expense was $3.9 million,
lines of credit interest expense was $0.9 million and mortgage interest expense
was $0.7 million. For the third quarter of 1998, notes payable interest expense
was $3.9 million, lines of credit interest expense was $0.4 million and mortgage
interest expense was $0.2 million.
General and administrative expenses increased $0.1 million to $1.6 million as
compared to $1.5 million for the third quarter of 1998. The change is primarily
attributable to increased salaries, incentive compensation and legal fees
partially offset by decreased shareholder expenses. For the third quarter of
1999, general and administrative expenses as a percentage of revenue were 5.3%
as compared to 5.7% for the third quarter of 1998.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Nine Months Ended September
30, 1999 Compared to the Nine Months Ended September 30, 1998
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Real estate expenses increased $2.9 million or 12.3% to $26.1 million as
compared to $23.2 million for the first nine months of 1998. This increase is
primarily due to expenses relating to $139.5 million of properties acquired in
1998 and 1999 as well as increased utilities, repairs and maintenance, operating
services and non-passthrough expenses in 1999 as compared to 1998 partially
offset by the impact of the $34.5 million of properties sold in 1998 and 1999.
Depreciation and amortization expense increased $2.6 million or 23.3% to $13.9
million as compared to $11.3 million for the first nine months of 1998. This is
primarily due to 1998 and year to date 1999 acquisitions of $57.2 million and
$82.3 million, respectively, and 1998 and year to date 1999 capital and tenant
improvement expenditures which totaled $11.8 million and $15.4 million,
respectively. The amount was partially offet by 1998 and year to date 1999
dispositions of $11.4 million and $23.1 million, respectively.
Total interest expense was $16.1 million for the first nine months of 1999 as
compared to $12.5 million for the third quarter of 1998. This increase is
primarily attributable to the issuance of $110.0 million in medium term notes in
February 1998, the assumption of $21.6 million in mortgages in November 1998 in
connection with the acquisition of Woodburn Medical Park, the assumption of an
$8.7 million mortgage in September 1999 in connection with the acquisition of
Avondale Apartments, and an increased average balance outstanding on the lines
of credit in 1999 due to 1999 property acquisitions. For the first nine months
of 1999, notes payable interest expense was $11.9 million, lines of credit
interest expense was $2.5 million and mortgage interest expense was $1.7
million. For the first nine months of 1998, notes payable interest expense was
$10.5 million, lines of credit interest expense was $1.5 million and mortgage
interest expense was $0.5 million.
General and administrative expenses decreased $0.2 million to $4.5 million as
compared to $4.7 million for the first nine months of 1998. The change is
primarily attributable to decreased incentive compensation and legal fees. For
the first nine months of 1999, general and administrative expenses as a
percentage of revenue were 5.2% as compared to 6.1% for the first nine months of
1998.
Gain on sale of real estate for the nine months ended September 30, 1999 was
$7.9 million, resulting from the sale of 444 N. Frederick Road, Arlington
Financial Center, Department of Commerce and V Street Distribution Center. Gain
on sale of real estate for the nine months ended June 30, 1998 was $5.9 million,
resulting from the sale of Shirley 395 Business Center and 5410 Port Royal
Business Center.
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 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 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,
1999, WRIT had $29 million outstanding under its lines of credit. WRIT acquired
six properties in
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1998 and six properties in 1999 (as of September 30) for total acquisition costs
of $82.2 million and $57.0 million, respectively. The 1998 acquisitions were
primarily financed through line of credit advances, from the February 1998
issuance of $110.0 million of medium term notes (after repayment of amounts
outstanding under line of credit advances of $95.3 million), the assumption of
mortgages payable of $21.6 million and from the reinvestment of the proceeds
from the sale of three properties in 1998 of $10.8 million. The 1999
acquisitions were financed through line of credit advances and the use of the
proceeds from the property sales in February 1999 and the assumption of a
mortgage payable of $8.7 million.
On September 27, 1999, WRIT closed on a $50.0 million mortgage note payable of
which the proceeds were used to pay down WRIT's unsecured lines of credit.
The mortgage is secured by five of WRIT's Virginia residential properties.
Cash flow from operating activities totaled $35.1 million for the first nine
months of 1999, as a result of net income before gain on sale of real estate of
$33.9 million, depreciation and amortization of $13.9 million, increases in
other assets of $1.2 million and decreases in liabilities (other than mortgage
note, senior notes and lines of credit payable) of $3.3 million. The majority of
the increase in cash flow from operating activities was due to a larger property
portfolio and increased rental rates.
Net cash used in investing activities for the first nine months of 1999 was
$42.0 million, including real estate acquisitions of $48.4 million and capital
improvements to real estate of $15.4 million offset by cash received from sale
of real estate properties of $22.0 million.
Net cash provided by financing activities for the first nine months of 1999 was
$4.2 million, including line of credit borrowings of $29.0 million, line of
credit repayments of $44.0 million, proceeds from mortgage note payable of $50.0
million, less principal payments on the mortgage notes payable of $0.4 million
and $30.9 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.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
The only material 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. 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 1998 Form 10-K.
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000
- ---------
General
- -------
WRIT has assessed and continues to assess the impact of the Year 2000 issue on
its reporting systems and operations. The Year 2000 issue exists because many
computer systems and applications and other systems using computer chips
currently use two-digit fields to designate a year. When the century date
occurs, date sensitive systems may recognize the year 2000 as 1900 or not at
all. This inability to recognize or properly treat the year 2000 may cause the
systems to process critical financial and operations information incorrectly.
In 1998, WRIT implemented a new financial reporting system. The implementation
was not done in response to Year 2000 issues but in order to improve reporting
processes. The new system is Year 2000 compliant. Management has implemented a
project to review the remaining operating systems, including building
operations, internal operating systems and third party compliance to determine
if there are any Year 2000 issues related to such systems.
Project
- -------
WRIT's Year 2000 Project (the "Project") is divided into three major
sections--Building Operations, Internal Operating Systems and External Agents
(i.e. tenants and third party suppliers). The general phases common to each
section are: (1) inventorying Year 2000 items; (2) assigning priorities to
identified items; (3) assessing the Year 2000 compliance of items determined to
be material to WRIT; (4) repairing or replacing material items that are
determined not to be Year 2000 compliant; (5) testing material items; and (6)
designing and implementing contingency and business continuation plans for each
property location and corporate headquarters.
As of September 30, 1999, the inventory, priority assignment and assessment of
material items phases of each section of the Project had been completed.
Material items are those that WRIT's management believes have a risk involving
the safety of individuals, damage to the environment or property or financial
loss. The testing phases of the Project are currently being performed by the
Trust.
The Building Operations section consists of assessing, repairing/replacement and
testing key systems at the property locations, such as fire detection/
prevention, elevators, heating/ ventilation and air conditioning, telephone and
utility services. The process of replacing items that are not in compliance
and the subsequent testing of these items is ongoing and is expected to be
completed by fourth quarter 1999. There have not been any significant repairs or
replacements related to this phase of the project. Contingency planning for this
section is underway. All Building Operations activities are expected to be
completed in the fourth quarter of 1999.
19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Internal Operating Systems section includes the assessment of existing
hardware and software and, where applicable, the replacement of hardware/
software that is not Year 2000 compliant. The assessment phase is complete, and
WRIT believes that all of the significant hardware and software is Year 2000
compliant. Contingency planning and testing for this section is expected to be
completed in November 1999.
The External Agents section includes the process of identifying and prioritizing
critical suppliers and customers at the direct interface level and communicating
with them about their plans and progress in addressing the year 2000 problem.
Evaluations of critical third parties, documentation and development of
contingency plans was complete as of September 30, 1999. The testing of certain
material vendors is underway with completion scheduled for the fourth quarter of
1999.
Costs
- -----
WRIT has not had any material expenditures related to the Year 2000 project as
of September 30, 1999. The total cost associated with required modifications to
become Year 2000 compliant is not expected to be material to WRIT's financial
position.
Risks
- -----
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Material failures could materially and adversely affect WRIT's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of tenants and third party suppliers,
WRIT is unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on WRIT's results of operations, liquidity
or financial condition. The Year 2000 Project is expected to significantly
reduce WRIT's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its material
External Agents. WRIT's management believes that with the completion of the
Project as scheduled, the possibility of significant interruptions should be
reduced.
Readers are cautioned that forward looking statements contained in the Year 2000
update should be read in conjunction with WRIT's disclosures under the heading:
"FORWARD LOOKING STATEMENTS."
20
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
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. July 26, 1999--Report pursuant to Item 5 on the release of
the Trust's June 30, 1999 earnings information
2. October 5, 1999--Report pursuant to Item 2 on the
acquisition of 1700 Research Boulevard, 600 Jefferson Plaza
and Avondale Apartments
3. October 26, 1999--Report pursuant to Item 5 on the release
of the Trust's September 30, 1999 earnings information
21
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/Larry E. Finger/
------------------------------------------------
Larry E. Finger,
Senior Vice President
and Chief Financial Officer
s/Laura M. Franklin/
------------------------------------------------
Laura M. Franklin,
Vice President,
Chief Accounting Officer and
Corporate Secretary
Date: November 15, 1999
22