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 MARCH 31, 2000 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 or organization) (IRS Employer Identification 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 35,733,793
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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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 13
Part II: Other Information
-----------------
Item l. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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, 1999 included in the Trust's 1999 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)
March 31, December 31,
2000 1999
------------------ ------------------
Assets
Real estate at cost $665,286 $661,870
Accumulated depreciation (87,635) (83,574)
------------------ ------------------
Total investment in real estate 577,651 578,296
Cash and temporary investments 5,914 4,716
Rents and other receivables, net of allowance for doubtful
accounts of $974 and $799, respectively 5,226 6,572
Prepaid expenses and other assets 18,527 18,896
------------------ ------------------
$607,318 $608,480
================== ==================
Liabilities
Accounts payable and other liabilities $ 8,834 $ 11,421
Tenant security deposits 5,310 5,006
Advance rents 1,995 3,304
Mortgage notes payable 86,851 87,038
Lines of credit payable 35,000 33,000
Notes payable 210,000 210,000
------------------ ------------------
347,990 349,769
------------------ ------------------
Minority interest 1,525 1,522
------------------ ------------------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000,000
shares authorized: 35,733 and 35,721 shares issued
and outstanding at March 31, 2000 and December 31,
1999, respectively 357 357
Additional paid-in capital 257,446 256,832
------------------ ------------------
257,803 257,189
------------------ ------------------
$607,318 $608,480
================== ==================
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 March 31,
2000 1999
--------------- --------------
Real estate rental revenue $31,935 $27,654
Real estate expenses (9,372) (8,423)
--------------- --------------
Operating income 22,563 19,231
Depreciation and amortization (5,430) (4,451)
--------------- --------------
Income from real estate 17,133 14,780
Other income 149 204
Interest expense (6,090) (5,220)
General and administrative (1,780) (1,315)
--------------- --------------
Income before gain on sale of real estate 9,412 8,449
--------------- --------------
Gain on sale of real estate 1,498 7,909
--------------- --------------
Net Income $10,910 $16,358
=============== ==============
Per share information based on the
weighted average number
of shares outstanding
Shares--Basic 35,734 35,708
Shares--Diluted 35,763 35,727
Net income per share--Basic $ 0.31 $ 0.46
=============== ==============
Net income per share--Diluted $ 0.31 $ 0.46
=============== ==============
Dividends paid $0.2925 $ 0.28
=============== ==============
See accompanying notes to financial statements
4
WASHINGTON REAL ESTATE INVESTMENT TRUST
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
(In Thousands)
Additional Shareholders'
Shares Par Value Paid in Capital Equity
------------------ ----------------- --------------------- --------------------
Balance, December 31, 1999 35,721 $357 $256,832 $257,189
Net income 10,910 10,910
Dividends (10,452) (10,452)
Share Grants 13 - 156 156
------------------ ----------------- --------------------- --------------------
Balance, March 31, 2000 35,734 $357 $257,446 $257,803
================== ================= ===================== ====================
See accompanying notes to financial statements
5
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended March 31,
2000 1999
---------------- ----------------
Cash Flow From Operating Activities
Net income $ 10,910 $16,358
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (1,498) (7,909)
Depreciation and amortization 5,430 4,451
Changes in prepaid and other assets 467 1,312
Changes in other liabilities (3,589) (4,728)
---------------- ----------------
Net cash provided by operating activities 11,720 9,484
---------------- ----------------
Cash Flow From Investing Activities
Capital improvements to real estate (3,016) (5,358)
Non-real estate capital improvements (122) (39)
Real estate acquisitions (1,358) (6,909)
Cash received for sale of real estate 2,456 22,033
---------------- ----------------
Net cash (used) provided by investing activities (2,040) 9,727
---------------- ----------------
Cash Flow From Financing Activities
Dividends paid (10,452) (9,999)
Borrowings - Lines of credit 2,000 10,000
Principal payments - Mortgage note payable (187) (134)
Share options exercised 157 100
---------------- ----------------
Net cash used in financing activities (8,482) (33)
---------------- ----------------
Net (decrease) increase in cash and temporary investments 1,198 19,178
Cash and temporary investments at beginning of period 4,716 4,595
---------------- ----------------
Cash and temporary investments at end of period $ 5,914 $23,773
================ ================
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the first three months for interest $ 9,694 $ 8,512
================ ================
See accompanying notes to financial statements
6
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1: NATURE OF BUSINESS
- --------------------------
Washington Real Estate Investment Trust ("WRIT") 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 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, 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 embedded in other contracts
(collectively referred
7
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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, this statement could affect 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 and
rental abatements from its residential and commercial leases when earned in
accordance with SFAS No. 13.
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. Impairment is generally assessed through comparison of amortized value
to fair value. No such losses have been recorded during 2000 or 1999.
Cash and Temporary Investments
Cash and temporary investments include cash equivalents with original maturities
of 90 days or less. At March 31, 2000 and March 31, 1999, cash and temporary
investments includes $2.5 million and $22 million, respectively, of escrowed
cash from property sales to be reinvested on a tax-free basis in real property.
The cash escrowed from property sales is voluntarily escrowed by the Company and
can be accessed without restriction at any time.
8
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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:
March 31, 2000
(In Thousands)
--------------
Office buildings $354,576
Industrial distribution centers 114,511
Apartment buildings 99,633
Shopping centers 96,566
--------
$665,286
========
As of March 31, WRIT acquired the following property during 2000:
Acquisition Date Property Property Rentable Square Feet Acquisition Cost
Name Type (in thousands)
- ------------------------------------------------------------------------------------------------------------------------
February 29, 2000 833 South Washington Street Retail 6,000 $1,350
On February 29, 2000, WRIT sold Prince William Plaza Shopping Center for $2.8
million in cash resulting in a gain of approximately $1.5 million. WRIT
anticipates that this sale will be the first step of a tax-deferred exchange
whereby the sales proceeds will be reinvested on a tax-free basis in another
real estate property.
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.
On September 27, 1999, WRIT executed a $50.0 million mortgage note payable
secured by the Ashby Apartments,
9
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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 received on the Unsecured
Lines of Credit Payable.
Annual maturities of principal as of March 31, 2000 are as follows:
(In Thousands)
2000 $ 583
2001 833
2002 902
2003 7,376
2004 820
Thereafter 76,337
-------
Total $86,851
=======
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of March 31, 2000, WRIT had two unsecured credit commitments in the amount of
$50 million and $25 million. As of March 31, 2000, $35 million was outstanding
under the credit commitments leaving $40 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 three months ended March 31, 2000 bore interest at rates ranging from
6.64 percent to 7.57 percent 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 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 and non-financial covenants which WRIT has met as of March 31,
2000.
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
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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 pay down its lines of credit and to finance acquisitions and capital
improvements to its properties.
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.
These notes contain certain financial and non-financial covenants which WRIT has
met as of March 31, 2000.
NOTE 7: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Distribution
Centers, Apartment Buildings and Shopping Centers. Office Buildings represent
52 percent of real estate rental revenue and provide office space for various
types of businesses. Industrial Distribution Centers represent 14 percent of
real estate rental revenue and are used for warehousing and distribution.
Apartment Buildings represent 20 percent of real estate rental revenue. These
properties provide housing for families throughout the Washington Metropolitan
area. Shopping Centers represent the remaining 14 percent 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
MARCH 31, 2000
(in thousands)
--------------
Three Months Ended March 31, 1999
---------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
----------------------------------------------------------------------------------------------------
Real estate rental revenue $ 16,695 $ 4,315 $ 6,400 $ 4,525 $ - $ 31,935
Real estate expenses 4,977 1,022 2,340 1,033 - 9,372
----------------------------------------------------------------------------------------------------
Operating income 11,718 3,293 4,060 3,492 - 22,563
Depreciation and amortization 3,082 915 849 584 - 5,430
----------------------------------------------------------------------------------------------------
Income from real estate 8,636 2,378 3,211 2,908 - 17,133
Other income - - - - 149 149
Interest expense (343) - (1,084) (161) (4,502) (6,090)
General and administrative - - - - (1,780) (1,780)
----------------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 8,293 $ 2,378 $ 2,127 $ 2,747 $(6,133) $ 9,412
====================================================================================================
Capital investments $ 2,438 $ 893 $ 559 $ 259 $ 134 $ 4,283
====================================================================================================
Total assets $320,024 $105,254 $79,237 $83,925 $18,878 $607,318
====================================================================================================
(in thousands)
--------------
Three Months Ended March 31, 1999
---------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
----------------------------------------------------------------------------------------------------
Real estate rental revenue $ 14,002 $ 3,829 $ 5,397 $ 4,426 $ - $ 27,654
Real estate expenses 4,492 870 2,045 1,016 - 8,423
----------------------------------------------------------------------------------------------------
Operating income 9,510 2,959 3,352 3,410 - 19,231
Depreciation and amortization 2,520 745 652 534 - 4,451
----------------------------------------------------------------------------------------------------
Income from real estate 6,990 2,214 2,700 2,876 - 14,780
Other income - - - - 204 204
Interest expense (414) - - (164) (4,642) (5,220)
General and administrative - - - - (1,315) (1,315)
----------------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 6,576 $ 2,214 $ 2,700 $ 2,712 $(5,753) $ 8,449
====================================================================================================
Capital investments $ 9,796 $ 802 $ 637 $ 1,032 $ 39 $ 12,306
====================================================================================================
Total assets $287,596 $95,545 $65,571 $84,610 $36,981 $570,303
====================================================================================================
NOTE 8: SUBSEQUENT EVENT
- -------------------------
On May 5, 2000, WRIT purchased Wayne Avenue Plaza for a purchase price of
$7.7 million. A portion of the funds used to purchase the 91,000 square foot
office property were provided by the proceeds discussed in Note 3 and an
additional $5 million advance on the unsecured lines of credit discussed in
Note 5.
12
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 March 31,
- -----------------------------------------------------------------------------
2000 Compared to the Three Months Ended March 31, 1999
- ------------------------------------------------------
Total revenues for the first quarter of 2000 increased 15.5% ($4.3 million) to
$31.9 million from $27.7 million in the first quarter of 1999. Operating income
increased 17.3% ($3.3 million) to $22.6 million from $19.2 million in the first
quarter of 1999.
For the first quarter of 2000, WRIT's office buildings had increases of 19.2% in
revenues and 23.2% in operating income, over the first quarter of 1999. These
increases were primarily due to the acquisitions of 600 Jefferson Plaza and 1700
Research Boulevard in May 1999, the acquisition of Parklawn Plaza in November
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 first quarter of 1999 and
2000, revenue and operating income increased 10.2% and 11.3% 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,
offset by a slight decrease in occupancy from 98.3% to 97.3%.
For the first quarter of 2000, WRIT's industrial distribution center revenues
and operating income increased 12.7% and 11.3%, respectively, over the first
quarter of 1999. These increases were primarily due to the acquisitions of
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 first quarters of 1999 and 2000, revenue and
operating income increased by 5.6% and 6.1% respectively. These increases in
revenues and operating income were primarily due to increased rental rates and
occupancy.
For the first quarter of 2000, WRIT's apartment revenues and operating income
increased 18.6% and 21.1%, respectively, over the first quarter of 1999. These
increases were primarily due to the acquisition of Avondale Apartments in
September 1999 and increased rental and occupancy rates in WRIT's core
portfolio. Comparing those apartment buildings owned by WRIT for the entire
first quarters of 1999 and 2000, revenue and operating income increased
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
by 8.3% and 13.7%, respectively. These increases in revenues and operating
income were primarily due to increased rental rates and occupancy. Occupancy
rates increased from 95.4% in first quarter 1999 to 97.7% in first quarter 2000.
For the first quarter of 2000, WRIT's shopping center revenues and operating
income increased 2.2% and 2.4%, respectively, over the first quarter of 1999.
These increases were primarily due to increased core portfolio revenues and
operating income, offset by the February 2000 sale of Prince William Plaza.
Comparing those shopping centers owned by WRIT for the entire first quarters of
1999 and 2000, revenue and operating income increased by 1.6% and 1.9%,
respectively. These increases were primarily due to increased rental and
occupancy rates.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended March 31,
- --------------------------------------------------------------------------------
2000 Compared to the Three Months Ended March 31, 1999
- ------------------------------------------------------
Real estate expenses increased $0.9 million or 11.3% to $9.4 million as compared
to $8.4 million for the first quarter of 1999. This increase is primarily due to
expenses relating to $63.1 million of properties acquired in 1999 and 2000
partially offset by the impact of the $25.9 million of properties sold in 1999
and 2000 and a 0.4% increase in core portfolio operating expense.
Depreciation and amortization expense increased $1.0 million or 22.0% to $5.4
million as compared to $4.5 million for the first quarter of 1999. This is
primarily due to 1999 and year to date 2000 acquisitions of $61.8 million and
$1.3 million, respectively, and 1999 and year to date 2000 capital and tenant
improvement expenditures which totaled $17.7 million and $4.3 million,
respectively. The amount was partially offset by 1999 and year to date 2000
dispositions of $23.1 million and $2.8 million, respectively.
Total interest expense was $6.1 million for the first quarter of 2000 as
compared to $5.2 million for the first quarter of 1999. This increase is
primarily attributable to a $50.0 million mortgage note payable executed in
September 1999 and secured by the Ashby Apartments, Country Club Towers, Munson
Hill Towers, Park Adams and Roosevelt Towers. The increase is also due to the
assumption of an $8.7 million mortgage in September 1999. For the first 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 $0.6 million.
For the first quarter of 1999, notes payable interest expense was $3.9 million,
mortgage interest expense was $0.6 million and lines of credit interest expense
was $0.7 million.
General and administrative expenses increased $0.5 million to $1.8 million as
compared to $1.3 million for the first quarter of 1999. The change is primarily
attributable to increased salaries, incentive compensation and professional
fees. For the first quarter of 2000, general and administrative expenses as a
percentage of revenue were 5.6% as compared to 4.8% for the first quarter of
1999.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 anticipates that over the near term, recent and future interest rate
increases 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 5 for further discussion). Only $35 million from unsecured lines
of credit payable of the $331.9 million total debt outstanding at March 31, 2000
was at a floating rate. WRIT estimates that a 200 basis point increase in
interest rates would result in less than a 1.5% reduction in earnings.
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 March 31, 2000,
WRIT had $35 million outstanding under its lines of credit. WRIT acquired seven
properties in 1999 and one property in 2000 (as of March 31) for total
acquisition costs of $61.8 million and $1.3 million, respectively. The 1999
acquisitions were financed through line of credit advances, 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 $11.7 million for the first three
months of 2000, as a result of net income before gain on sale of real estate of
$9.4 million, depreciation and amortization of $5.4 million, decreases in other
assets of $0.5 million and decreases in liabilities (other than mortgage note,
senior notes and lines of credit payable) of $3.6 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 three months of 2000 was
$2.0 million, including real estate acquisitions of $1.4 million and capital
improvements to real estate of $3.0 million offset by cash received from sale of
real estate properties of $2.5 million.
Net cash used in financing activities for the first three months of 2000 was
$8.5 million, including line of credit borrowings of $2.0 million, principal
repayments on the mortgage notes payable of $0.2 million and $10.5 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.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 1999 Form 10-K.
YEAR 2000
- ---------
WRIT's Year 2000 Project completion resulted in no interruption or failure of
normal business activities or operations. No material failures or significant
interruptions were experienced that materially or adversely affected WRIT's
operations, liquidity or financial condition. The total costs incurred to
become Year 2000 compliant were not material to WRIT's financial position in
first quarter 2000 or first quarter 1999. Any future cost associated with Year
2000 compliancy is not expected to be material to WRIT's financial position.
16
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. February 22, 2000--Report pursuant to Item 5 on the release of the
Trust's December 31, 1999 earnings information.
2. April 25, 2000--Report pursuant to Item 5 on the release of the
Trust's March 31, 2000 earnings information.
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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: May 12, 2000
18