<PAGE>
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, 1997 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)
10400 CONNECTICUT AVENUE, KENSINGTON, MARYLAND 20895
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (301) 929-5900
--------------
- -------------------------------------------------------------------------------
(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 35,577,844
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
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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 Statements of Cash Flows 5
Consolidated Statement of Changes in Shareholders' Equity 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 12
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 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, 1996 included in the Trust's 1996 Form 10-K Report filed with the
Securities and Exchange Commission.
2
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PART I
ITEM I. FINANCIAL STATEMENTS
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Assets
Real estate at cost............................................................... $ 375,109 $ 352,579
Accumulated depreciation.......................................................... (53,850) (46,639)
------------- ------------
321,259 305,940
Mortgage note receivable.......................................................... 796 799
------------- ------------
Total investment in real estate................................................... 322,055 306,739
Cash and temporary investments.................................................... 34,178 1,676
Rents and other receivables, net of allowance for doubtful accounts of $987 and
$534, respectively.............................................................. 3,960 3,429
Prepaid expenses and other assets................................................. 9,274 6,644
------------- ------------
$ 369,467 $ 318,488
------------- ------------
------------- ------------
Liabilities
Accounts payable and other liabilities............................................ $ 4,945 $ 5,954
Tenant security deposits.......................................................... 2,788 2,523
Advance rents..................................................................... 1,948 1,798
Mortgage note payable............................................................. 7,494 7,590
Lines of credit payable........................................................... -- 5,000
Senior notes payable.............................................................. 100,000 100,000
------------- ------------
117,175 122,865
------------- ------------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000,000 shares authorized:
35,577,844 and 31,802,975 shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively............................................. 356 318
Additional paid-in capital........................................................ 251,936 195,305
------------- ------------
252,292 195,623
------------- ------------
$ 369,467 $ 318,488
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements
3
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WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------ ------------ ------------ ------------
Real estate rental revenue............................... $ 19,436 $ 17,056 $ 57,037 $ 47,567
Real estate expenses..................................... (6,432) (6,062) (18,563) (16,071)
------------ ------------ ------------ ------------
13,004 10,994 38,474 31,496
Depreciation and amortization............................ (2,639) (2,039) (7,626) (5,433)
------------ ------------ ------------ ------------
Income from real estate.................................. 10,365 8,955 30,848 26,063
Other income............................................. 490 263 717 498
Interest expense......................................... (2,203) (1,673) (6,789) (3,316)
General and administrative............................... (988) (697) (2,945) (2,361)
------------ ------------ ------------ ------------
Net Income............................................... $ 7,664 $ 6,848 $ 21,831 $ 20,884
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Per share information based on the weighted average
number of shares outstanding
Shares................................................... 34,314,257 31,751,734 32,663,726 31,751,734
Net income............................................... $ 0.22 $ 0.22 $ 0.67 $ 0.66
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Dividends paid........................................... $ 0.27 $ 0.26 $ 0.80 $ 0.77
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements
4
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WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Cash Flow From Operating Activities
Net income................................................................................ $ 21,831 $ 20,884
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization............................................................. 7,626 5,433
Changes in other assets................................................................... (3,574) (1,792)
Changes in other liabilities.............................................................. (594) 1,900
--------- ---------
Net cash provided by operating activities................................................. 25,289 26,425
--------- ---------
Cash Flow From Investing Activities
Capital improvements to real estate....................................................... (8,798) (6,968)
Real estate acquisitions.................................................................. (13,732) (60,667)
--------- ---------
Net cash used in investing activities..................................................... (22,530) (67,635)
--------- ---------
Cash Flow From Financing Activities
Dividends paid............................................................................ (26,475) (24,449)
Net proceeds from sale of shares of beneficial interest................................... 60,941 --
Net proceeds from debt offering........................................................... -- 97,648
Borrowings - Lines of credit.............................................................. 18,000 43,000
Repayments - Lines of credit.............................................................. (23,000) (67,000)
Principal payments - Mortgage note payable................................................ (95) (87)
Share options exercised................................................................... 372 --
--------- ---------
Net cash provided by financing activities................................................. 29,743 49,112
--------- ---------
Net increase in cash and temporary investments............................................ 32,502 7,902
Cash and temporary investments at beginning of year....................................... 1,676 3,532
--------- ---------
Cash and temporary investments at end of period........................................... $ 34,178 $ 11,434
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the first nine months for interest.................................... $ 8,422 $ 2,506
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements
5
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WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID
IN SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EQUITY
------------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996................................... 31,802,975 $ 318 $ 195,305 $ 195,623
Net income................................................... 21,831 21,831
Net Proceeds from Sale of Shares............................. 3,750,000 38 60,903 60,941
Dividends.................................................... (26,475) (26,475)
Share Options Excercised..................................... 24,869 0 372 372
------------ ----- ---------- -------------
Balance, September 30, 1997.................................. 35,577,844 $ 356 $ 251,936 $ 252,292
------------ ----- ---------- -------------
------------ ----- ---------- -------------
</TABLE>
See accompanying notes to financial statements
6
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (Unaudited)
NOTE A: NATURE OF BUSINESS
Washington Real Estate Investment Trust ("WRIT" or the "Trust") 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 Mid-Atlantic 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.
In June 1996, WRIT changed its domicile from the District of Columbia to the
State of Maryland. Issued and outstanding shares were assigned a par value of
$.01 per share.
NOTE B: 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
the Trust believes that the disclosures made are adequate to make the
information presented not misleading.
In 1995 WRIT formed a subsidiary partnership, WRIT Limited Partnership, a
Maryland limited partnership, in which WRIT currently owns 99.9% of the
partnership interest. WRIT Limited Partnership's financial statements are
consolidated with WRIT's financial statements. All significant intercompany
balances and transactions have been eliminated. Minority Interests are included
in other income (expense) and accounts payable and other liabilities on the
accompanying consolidated statements.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" ("SFAS 128"). SFAS 128 changes the requirements for calculation and
disclosure of earnings per share. This statement eliminates the calculation
of primary earnings per share and requires the disclosure of basic earnings
per share and diluted earnings per share. WRIT will adopt this statement's
required disclosures in connection with the financial statements issued for
the reporting period ended December 31, 1997. The adoption of this statement
will have an immaterial impact to WRIT's current disclosures.
During 1997, FASB issued SFAS No. 129 "Disclosure of Information about Capital
Structure" ("SFAS 129"). SFAS 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. The adoption of this statement will have no impact on WRIT's
current disclosures.
7
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (Unaudited)
In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and other Related Information" ("SFAS 131"). SFAS 131 requires
public companies to report financial information about operating segments.
WRIT will adopt this statement's required disclosures in connection with the
statements issued for the reporting period ended December 31, 1997. In its
financial statements for the period ended December 31, 1997, WRIT will
disclose certain operating information for each of its four property types:
Office Buildings, Shopping Centers, Apartment Buildings and Industrial
Distribution Centers.
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 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 senior subordinated notes are capitalized
and are being 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. As of September 30, 1997, no such losses have been recorded.
Cash and Temporary Investments
Cash and temporary investments includes cash equivalents with original
maturities of 90 days or less.
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.
8
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (Unaudited)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE C: REAL ESTATE INVESTMENTS
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C., Virginia and Delaware as follows:
September 30, 1997
(In Thousands)
Office buildings $166,934
Shopping centers 86,828
Apartment buildings 62,411
Industrial distribution centers 58,936
--------
$375,109
--------
--------
Properties acquired by WRIT during the first nine months of 1997 are as follows:
<TABLE>
Acquisition Rentable Acquisition Cost
Date Property Type Square Feet (In Thousands)
- -------- ---------------------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
2/28/97 Ammendale Technology Park I Industrial 167,000 $7,847
2/28/97 Ammendale Technology Park II Industrial 108,000 5,885
------- -------
275,000 $13,732
</TABLE>
NOTE D: UNSECURED LINES OF CREDIT PAYABLE
As of September 30, 1997, WRIT had an unsecured credit commitment of $25
million. No amounts were outstanding under this credit commitment as of
September 30, 1997. Interest only is payable monthly, in arrears, on the unpaid
principal balance. Amounts outstanding under this credit commitment during the
nine months ended September 30, 1997 bore interest at the rate of 6.83% 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 and all unpaid principal and
interest are due January 31, 1999.
The $25 million credit commitment requires WRIT to pay the lender an unused
commitment fee at the rate of 0.175% per annum on the amount by which $25
million exceeds the balance of outstanding advances and term loans. At September
30, 1997, $25 million of this commitment was unused. This fee is payable
quarterly. This commitment also contains certain financial covenants related to
debt, net worth, and cash flow, and non-financial covenants which WRIT has met
as of September 30, 1997.
As of September 30, 1997, WRIT had an unsecured credit commitment of $50
million. No amounts were outstanding under this credit commitment as of
9
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (Unaudited)
September 30, 1997. Interest only is payable monthly, in arrears, on the
unpaid principal balance. Amounts outstanding under this credit commitment
during the nine months ended September 30, 1997 bore interest at rates
ranging from 6.19% to 6.29% per annum. All unpaid interest and principal are
due July 25, 1998, and can be prepaid prior to this date without any
prepayment fee. WRIT has the option to extend this agreement until July 25,
1999. All new advances shall bear interest at LIBOR plus a spread based on
WRIT's credit rating on its publicly issued debt. This credit agreement
provides the option to WRIT to convert any advances or portions thereof into
a term loan at any time after January 25, 1998 and prior to July 25, 1998 or
July 25, 1999, if extended. The principal amount of each term loan, if any,
shall be repaid on July 25, 2001. Such term loan(s) may be prepaid subject to
a prepayment fee.
The $50 million credit commitment requires WRIT to pay the lender an unused
commitment fee at the rate of 0.175% per annum on the amount by which $50
million exceeds the balance of outstanding advances and term loans (see Note G:
Subsequent Events). At September 30, 1997, $50 million of this commitment was
unused. This fee is payable quarterly in arrears. This commitment also
contains an interest coverage ratio covenant and certain other non-financial
covenants which WRIT has met as of September 30, 1997.
See Note G: Subsequent Events for borrowings on the credit commitments made
and expected to be made subsequent to September 30, 1997.
NOTE E: SENIOR 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. These notes also contain certain financial and
non-financial covenants which WRIT has met as of September 30, 1997.
NOTE F: SALE OF SHARES OF BENEFICIAL INTEREST
On August 1, 1997 WRIT sold 3.75 million shares of beneficial interest to the
public for $61.1 million. WRIT's expenses related to this underwriting were
$190,000 and the net proceeds from this underwriting are estimated at
$60.9 million. In August 1997 and September 1997, $19 million and $4 million,
respectively, of the net proceeds was used to repay certain borrowings
outstanding under the Trust's lines of credit. In October and November 1997,
the balance of the net proceeds was used to purchase income producing
properties (see Note G) and for capital improvements.
10
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (Unaudited)
NOTE G: SUBSEQUENT EVENTS
On October 17, 1997 WRIT Limited Partnership, purchased 1600 Wilson Boulevard
office building ("1600 Wilson Boulevard") containing 165,286 rentable square
feet located in Rosslyn, Virginia from the Boeing Pension Fund, for a
contract purchase price of $23.3 million. The contract purchase price was
paid from a portion of the proceeds of the August 1, 1997 equity offering.
On the date of acquisition, the Property was 97% leased.
On October 31, 1997 WRIT Limited Partnership, purchased Pickett industrial
center ("Pickett") containing 246,108 rentable square feet located in
Alexandria, Virginia from OTR, General Partnership, an affiliate of the State
Teachers Retirement System of Ohio, for a contract purchase price of $8.2
million. The contract purchase price was paid from a portion of the proceeds
of the August 1, 1997 equity offering. On the date of acquisition, Pickett
was 85% leased.
On November 12, 1997 WRIT Limited Partnership, purchased Bethesda Hill
apartment building ("Bethesda Hill") containing 195 residential units in
ten four story buildings located in Bethesda, Maryland from an independent
equity fund of the First National Bank of Chicago, for a contract purchase
price of $17 million. The contract purchase price was paid out of an advance
from WRIT's unsecured line of credit with Crestar bank and its participant,
Signet Bank/Virginia ("Crestar"). On the date of acquisition, Bethesda Hill
was 98% leased.
WRIT Limited Partnership, is scheduled to purchase Space Center Tysons office
building ("Space Center") containing 478,000 rentable square feet located in
McLean, Virginia from Space Center Tyson's, Inc., for a contract purchase
price of $76 million. The contract purchase price is expected to be paid out
of advances from WRIT's unsecured lines of credit with Crestar and the First
National Bank of Chicago, and out of an advance from WRIT's unsecured bridge
loan with the First National Bank of Chicago. Space Center is currently 100%
leased.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
WRIT's Management's Discussion and Analysis of Financial Condition and Results
of Operations contains statements that may be considered forward looking.
Although the Trust 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 the Trust's current expectations
include general economic conditions, local real estate conditions, the
performance of properties that the Trust has acquired or may acquire and other
risks, detailed from time to time in the Trust's past and future SEC reports.
REAL ESTATE RENTAL REVENUE: Three Months Ended September 30, 1997 Compared to
the Three Months Ended September 30, 1996
Total revenues for the third quarter 1997 increased 13.5% ($2.3 million) to
$19.4 million from $17.1 million in the third quarter of 1996.
For the third quarter of 1997, WRIT's office buildings had increases of 13.1% in
revenues and 21.2% in operating income, over the third quarter of 1996. These
increases were due primarily to increases in rental rates at Arlington Financial
Center office building, the expansion of 7700 Leesburg Pike office building in
December 1996 and increases in occupancy at the 1901 Pennsylvania Avenue and the
51 Monroe Street office buildings. There were no property additions in WRIT's
office building portfolio in the third quarter of 1997 compared to the third
quarter of 1996.
For the third quarter of 1997, WRIT's shopping center revenues were unchanged
and operating income decreased 2.2% as compared to the third quarter of 1996.
Operating income decreased due to increased common area maintenance expense,
increased legal expense and increased bad debt expense at Prince William
Plaza and Bradlee shopping centers. There were no property additions in
WRIT's shopping center portfolio in the third quarter of 1997 compared to the
third quarter of 1996.
For the third quarter of 1997, WRIT's apartment revenues and operating income
increased 13.9% and 18.7% respectively, over the third quarter of 1996. These
increases were due primarily to the acquisition of the Ashby Apartments in
August of 1996. Comparing those apartment buildings owned by WRIT for the
entire third quarter of 1996 to their results in the third quarter of 1997,
revenue and operating income increased 0.2% and 4.7% respectively, over the
third quarter of 1996. The increases in revenues and operating income were due
primarily to increased rental rates for the group, offset partially by increased
vacancy at Munson Hill Towers and Country Club Towers.
For the third quarter of 1997, WRIT's industrial distribution center revenues
and operating income increased 49.5% and 51.9% respectively, over the third
quarter of 1996. This was due primarily to the acquisitions in the fourth
quarter of 1996 of the Alban business center and the Earhart Building and
in March 1997 of Ammendale Technology Park I and II, partially offset by
decreased recoveries. Comparing those industrial distribution centers owned
by WRIT for the third quarter of 1996 to their same results in the third
quarter of 1997,
12
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revenue and operating income decreased 9.4% and 9.2% respectively, from the
third quarter of 1996. These decreases are primarily due to decreased
recoveries and decreased occupancy at Crossroads, 5410 Port Royal and Tech
100 industrial distribution centers offset partially by decreased operating
expenses.
REAL ESTATE RENTAL REVENUE: Nine Months Ended September 30, 1997 Compared to
the Nine Months Ended September 30, 1996
Total revenues for the nine months ended September 30, 1997 increased 19.7%
($9.4 million) to $57.0 million from $47.6 million in the first nine months of
1996.
For the first nine months of 1997, WRIT's office building revenue increased
21.1% and operating income increased 24.8% over the first nine months of 1996.
These increases were due primarily to the acquisitions of the Maryland Trade
Center I and II office buildings in May 1996, the expansion of 7700 Leesburg
Pike in December 1996, increases in rental rates at the Arlington Financial
Center office building and increases in occupancy at the 1901 Pennsylvania
Avenue and the 51 Monroe Street office buildings. Comparing those office
buildings owned by WRIT for the entire first nine months of 1996 to their
results in the first nine months of 1997, revenues and operating income
increased 21.1% and 24.8% respectively, over the first nine months of 1996.
These increases were due primarily to the expansion of 7700 Leesburg Pike in
December 1996, increased rental rates at the Arlington Financial Center office
building, increases in occupancy at the 1901 Pennsylvania Avenue and 51 Monroe
Street office buildings and decreased bad debt expense.
For the first nine months of 1997, WRIT's shopping center revenues increased
1.8% and operating income increased 4.1% over the first nine months of 1996.
Revenues increased due to rate and occupancy gains for the group offset
partially by reduced CAM recoveries for the group which resulted from decreased
utility and snow removal expenses. Operating income increased due to decreased
utility and snow removal expenses which were higher in the first nine months of
1996 due to the unusually severe weather. There were no property additions in
WRIT's shopping center portfolio in the first nine months of 1997 compared to
the first nine months of 1996.
For the first nine months of 1997, WRIT's apartment revenues and operating
income increased 27.5% and 30.3% respectively, over the first nine months of
1996. These increases were due primarily to the acquisition of Walker House
Apartments in March 1996 and the Ashby Apartments in August of 1996.
Comparing those apartment buildings owned by WRIT for the entire first nine
months of 1996 to their results in the first nine months of 1997, revenue and
operating income increased 5.9% and 8.0% respectively, over the first nine
months of 1996. The increases in revenues and operating income were due
primarily to increased rental rates and occupancy for the group and decreased
utility and snow removal expenses which were higher in the nine months of
1996 due to the unusually severe weather, offset partially by increased
vacancy at Country Club Towers.
For the first nine months of 1997, WRIT's industrial distribution center
revenues and operating income increased 40.3% and 40.1% respectively, over
the first nine months of 1996. This was due primarily to the acquisitions in
October 1996 of the Alban business center, in December 1996 of the Earhart
Building and in March 1997 of Ammendale Technology Park I and II, partially
offset by increased bad debt and increased vacancies. Comparing those
industrial distribution centers owned by WRIT for the entire first nine
months of 1996 to their same results in the first nine months of 1997,
revenue and operating income decreased 6.2% and 6.4% respectively, from the
first nine months of 1996.
13
<PAGE>
These decreases are primarily due to increased bad debt, decreased recoveries
and increased vacancies offset partially by decreased operating expenses.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended September
30, 1997 Compared to the Three Months Ended September 30, 1996
Depreciation and amortization expense increased $600,000 to $2.6 million as
compared to $2.0 million for the third quarter of 1996. This is primarily due
to 1996 acquisitions of $69.9 million, 1996 capital and tenant improvement
expenditures which totaled $12.0 million, 1997 acquisitions of $13.7 million and
1997 year-to-date capital and tenant improvement expenditures which total $8.8
million.
Other income increased as compared to the third quarter of 1996 due to increased
investment earnings. This increase resulted from a higher average balance of
cash and temporary investments in the third quarter of 1997 as compared to the
third quarter of 1996.
Total interest expense was $2.2 million for the third quarter of 1997 as
compared to $1.7 million for the third quarter of 1996. This increase is
primarily attributable to the issuance of $100 million in debt securities in
August 1996. For the third quarter of 1997, senior notes payable interest
expense was $1.9 million, lines of credit interest expense was $163,000
attributable to advances for 1996 and 1997 acquisitions and mortgage interest
expense was $169,000. For the third quarter of 1996, senior notes payable
interest expense was $1.0 million, lines of credit interest expense was $537,000
attributable to advances for 1995 and 1996 acquisitions and mortgage interest
expense was $172,000.
General and administrative expenses increased $0.3 million to $1.0 million as
compared to $0.7 million for the third quarter of 1996. The increase is
primarily attributable to personnel additions in 1996 and 1997, increased
incentive compensation, and increased shareholder expenses. For the third
quarter of 1997, general and administrative expenses as a percentage of revenue
were 5.09% as compared to 4.09% for the third quarter of 1996.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Nine Months Ended September
30, 1997 Compared to the Nine Months Ended September 30, 1996
Depreciation and amortization expense increased $2.2 million to $7.6 million as
compared to $5.4 million for the first nine months of 1996. This is primarily
due to 1996 acquisitions of $69.9 million, 1996 capital and tenant improvement
expenditures which totaled $12.0 million, 1997 acquisitions of $13.7 million and
1997 capital and tenant improvement expenditures which total $8.8 million.
Other income increased in the first nine months of 1997 as compared to the first
nine months of 1996. This increase resulted from a higher average balance of
cash and temporary investments in the third quarter of 1997 as compared to the
third quarter of 1996.
Total interest expense was $6.8 million for the first the first nine months of
1997 as compared to $3.3 million for the the first nine months of 1996.
14
<PAGE>
This increase is primarily attributable to the issuance of $100 million in debt
securities in August 1996. For the first nine months of 1997, senior notes
payable interest expense was $5.6 million, lines of credit interest expense
was $671,000 attributable to advances for 1996 and 1997 acquisitions and
capital improvements, and mortgage interest expense was $509,000. For the
first nine months of 1996, senior notes payable interest expense was $1.0
million, lines of credit interest expense was $1.8 million attributable to
advances for 1995 and 1996 acquisitions and mortgage interest expense was
$518,000.
General and administrative expenses increased $0.6 million to $2.9 million as
compared to $2.3 million for the first nine months of 1996. The increase is
primarily attributable to personnel additions in 1996 and 1997, increased
incentive compensation, and increased shareholder expenses. For the first nine
months of 1997, general and administrative expenses as a percentage of revenue
were 5.17% as compared to 4.96% for the first nine months of 1996.
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 will continue to be available to
WRIT from its existing unsecured credit commitments and management believes that
additional sources of capital are available from selling additional shares
and/or the sale of medium or long-term notes. The funds raised would be used to
pay off any outstanding advances on the Trust's lines of credit and for new
acquisitions and capital improvements.
On March 12, 1997, WRIT filed a shelf registration statement with the
Securities and Exchange Commission which registered up to $200 million of
securities for sale at WRIT's option (see Note F: Sale of Shares of
Beneficial Interest). The securities to be sold may be any combination of
common shares, debt, preferred stock or common share warrants. Any issuance
of preferred shares would require the prior approval of the Board of Trustees
and a majority of the shareholders. The shelf registration statement
effectively pre-files a registration statement for securities thereby
shortening the time required to commence an offering when a decision to raise
capital is made. This registration statement is effective for an unlimited
period as long as WRIT continues to meet certain Securities and Exchange
Commission reporting requirements.
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,
1997, WRIT had no amounts outstanding under its lines of credit.
Cash flow from operating activities totaled $25.3 million for the first nine
months of 1997, as a result of net income of $21.8 million, depreciation and
amortization of $7.6 million, increases in other assets of $3.6 million and
decreases in liabilities (other than mortgage note, senior notes and lines of
credit payable) of $594,000. The majority of the increase in cash flow from
operating activities was due to a larger property portfolio.
Net cash used in investing activities for the first nine months of 1997 was
$22.5 million including property acquisitions of $13.7 million and capital
improvements to real estate of $8.8 million.
Net cash provided by financing activities for the first nine months of 1997
was $29.7 million, including net proceeds from sale of shares of beneficial
interest of $60.9 million, line of credit borrowings of $18 million,
repayment of line of credit borrowings of $23 million, and proceeds from
share options exercised of $372,000, offset by principal repayments of $95,000
on the mortgage note payable and $26.5 million in dividends paid.
15
<PAGE>
Rental revenue has been the principal source of funds to pay WRIT's operating
expenses, interest expense and dividends to shareholders.
Management believes that the Trust 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.
Historically WRIT has acquired 100% ownership in property. However, in 1995
WRIT formed a subsidiary partnership, WRIT Limited Partnership, in which WRIT
currently owns 99.9% of the partnership interest. As of September 30, 1997,
WRIT Limited Partnership has acquired 10 properties for cash contributed or
loaned to the partnership by WRIT. WRIT intends to use WRIT Limited Partnership
to offer property owners an opportunity to contribute properties in exchange for
WRIT Limited Partnership units. Such a transaction will enable property owners
to diversify their holdings and to obtain a tax deferred contribution for WRIT
Limited Partnership units rather than make a taxable cash sale. To date, no
such exchange transactions have occurred. WRIT believes that WRIT Limited
Partnership will provide WRIT an opportunity to acquire real estate assets which
might not otherwise have been offered to it.
16
<PAGE>
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
None
(27) Financial Data Schedule
(b) Reports on Form 8-K
WRIT filed a Current Report on Form 8-K dated October
31, 1997 reporting, pursuant to Item 2, the acquisition
of the 1600 Wilson Boulevard office building on
October 17, 1997 and providing, pursuant to Item 7,
the Audited Historical Summary of Gross Income and
Direct Operating Expenses for 1600 Wilson Boulevard
office building for the year ended December 31,
1996; the Unaudited Pro Forma Condensed and
Consolidated Balance Sheet for the Trust as of June
30, 1997; and the Unaudited Pro Forma Condensed and
Consolidated Statements of Operations for the Trust
for the year ended December 31, 1996 and the six
months ended June 30, 1997.
17
<PAGE>
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 Finance
and Chief Financial Officer
/s/ Laura M. Franklin
------------------------------------------
Laura M. Franklin,
Vice President Finance
and Chief Accounting Officer
Date: November 14, 1997
18
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