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, 1998 COMMISSION FILE NO. 1-6622
------------------ ------
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 53-0261100
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
</TABLE>
6110 EXECUTIVE BOULEVARD, ROCKVILLE, MARYLAND 20852
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (301) 984-9400
---------------
Former address: 10400 Connecticut Avenue Kensington, Maryland 20895
-------------------------------------------------------------------
(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 35,692,042
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
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 13
Part II: Other Information
-----------------
Item l. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
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, 1997 included in the Trust's 1997 Form 10-K
Report filed with the Securities and Exchange Commission.
2
<PAGE>
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,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Real estate at cost $558,100 $504,315
Accumulated depreciation (64,879) (56,015)
-------- --------
Total investment in real estate 493,221 448,300
Cash and temporary investments 3,560 7,908
Rents and other receivables, net of allowance for doubtful
accounts of $771 and $884, respectively 4,355 4,035
Prepaid expenses and other assets 16,986 8,328
-------- --------
$518,122 $468,571
======== ========
Liabilities
Accounts payable and other liabilities $9,148 $8,068
Tenant security deposits 4,136 3,089
Advance rents 2,150 2,615
Mortgage note payable 7,357 7,461
Lines of credit payable 30,000 95,250
Notes payable 210,000 100,000
-------- --------
262,791 216,483
-------- --------
Minority interest 1,524 -
-------- --------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000,000
shares authorized: 35,692,042 and 35,678,110 shares issued
and outstanding at September 30, 1998 and December 31,
1997, respectively 357 357
Additional paid-in capital 253,450 251,731
-------- --------
253,807 252,088
-------- --------
$518,122 $468,571
======== ========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real estate rental revenue $26,243 $19,436 $ 76,157 $ 57,037
Real estate expenses (8,288) (6,432) (23,232) (18,563)
------- ------- -------- --------
17,955 13,004 52,925 38,474
Depreciation and amortization (3,889) (2,639) (11,272) (7,626)
------- ------- -------- --------
Income from real estate 14,066 10,365 41,653 30,848
Other income 165 490 712 717
Interest expense (4,469) (2,203) (12,484) (6,789)
General and administrative (1,485) (988) (4,663) (2,945)
------- ------- -------- --------
Income before gain on sale of real estate 8,277 7,664 25,218 21,831
------- ------- -------- --------
Gain on sale of real estate - - 5,926 -
------- ------- -------- --------
Net Income $ 8,277 $ 7,664 $ 31,144 $ 21,831
======= ======= ======== ========
Per share information based on the
weighted average number
of shares outstanding
Shares-- Basic 35,692,042 34,314,257 35,687,085 32,663,726
Shares-- Diluted 35,798,442 34,329,829 35,798,041 32,685,303
Net income per share-- Basic $0.23 $0.22 $0.87 $0.67
========== ========== ========== ===========
Net income per share-- Diluted $0.23 $0.22 $0.87 $0.67
========== ========== ========== ===========
Dividends paid $0.28 $0.27 $0.83 $0.80
========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flow From Operating Activities
Net income $ 31,144 $ 21,831
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (5,926) -
Depreciation and amortization 11,272 7,626
Changes in other assets (1,585) (3,221)
Changes in other liabilities 1,685 (594)
-------- --------
Net cash provided by operating activities 36,590 25,642
-------- --------
Cash Flow From Investing Activities
Capital improvements to real estate (11,780) (8,798)
Non-real estate capital improvements (1,040) (353)
Real estate acquisitions (45,375) (13,732)
Cash received for sale of real estate 9,239 -
-------- --------
Net cash used in investing activities (48,956) (22,883)
-------- --------
Cash Flow From Financing Activities
Dividends paid (29,620) (26,475)
Net proceeds from sale of shares of beneficial interest - 60,941
Net proceeds from debt offering 102,797 -
Borrowings - Lines of credit 30,000 18,000
Repayments - Lines of credit (95,250) (23,000)
Principal payments - Mortgage note payable (104) (95)
Share options exercised 195 372
-------- --------
Net cash provided by financing activities 8,018 29,743
-------- --------
Net increase (decrease) in cash and temporary investments (4,348) 32,502
Cash and temporary investments at beginning of year 7,908 1,676
-------- --------
Cash and temporary investments at end of period $ 3,560 $ 34,178
======== ========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the first nine months for interest $ 11,906 $ 8,422
======== ========
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Additional Shareholders'
Shares Par Value Paid in Capital Equity
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 35,678 $357 $251,731 $252,088
Net income 31,144 31,144
Dividends (29,620) (29,620)
Share Options Exercised 14 0 195 195
------------ ------------ -------------- ------------
Balance, September 30, 1998 35,692 $357 $253,450 $253,807
============ ============ ============== ============
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (Unaudited)
NOTE 1: 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.
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.
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 general and administrative expense and accounts payable and other liabilities
on the accompanying consolidated statements.
New Accounting Pronouncements
In 1997, WRIT adopted the provisions of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and other Related
Information" ("SFAS No. 131"). SFAS No. 131 requires public companies to report
financial information about operating segments. See Note 7 for WRIT's
disclosure of certain operating information for each of its four property types:
Office Buildings, Industrial Distribution Centers, Apartment Buildings and
Shopping Centers.
In February 1998, SFAS No. 132 "Employers' Disclosure about Pension and Other
Postretirement Benefits" ("SFAS No. 132") was issued. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on the changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures previously required. SFAS
No. 132 is effective for fiscal years
7
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (Unaudited)
beginning after December 31, 1997 and is not expected to have a material effect
on WRIT's financial statements.
Revenue Recognition
Residential properties are leased under operating leases with terms of generally
one year or less, and commercial properties are leased under operating leases
with average terms of three to five years. WRIT recognizes rental income 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 were recorded in the nine months ended September 30,
1998.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
8
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (Unaudited)
NOTE 3: 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 30,1998
(In Thousands)
--------------
Office buildings $284,939
Industrial distribution centers 96,224
Apartment buildings 81,997
Shopping centers 94,940
--------
$558,100
========
Properties acquired by WRIT during the first nine months of 1998 are as follows:
<TABLE>
<CAPTION>
Acquisition
Property Property Rentable Cost (in
Acquisition Date Name Type Square Feet thousands)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 22, 1998 Northern Virginia Industrial Park Industrial 790,000 $30,350
June 23, 1998 800 South Washington Street Retail 45,000 $6,100
September 11, 1998 8900 Telegraph Road Industrial 32,000 $1,810
September 30, 1998 8230 Boone Boulevard Office 58,000 $8,100
</TABLE>
NOTE 4: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of September 30, 1998, WRIT had two unsecured credit commitments in the
amount of $50 million and $25 million. $30 million was outstanding under the
credit commitments as of September 30, 1998. 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 and an
unsecured bridge loan commitment (which expired in February 1998) during the
nine months ended September 30, 1998 bore interest at rates ranging from 5.76%
to 8.50% 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, 2000.
The credit commitments require WRIT to pay the lenders unused commitment fees at
the rate of 0.175% per annum on the amount by which the unused portion of the
commitment exceeds the balance of outstanding advances and term loans. These
fees are payable quarterly. At September 30, 1998, $45 million was available
under the credit commitments. 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, 1998.
9
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (Unaudited)
NOTE 5: 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, 1998.
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 the Trust 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.
NOTE 6: SALE OF REAL ESTATE
- ---------------------------
On March 23, 1998, WRIT sold the Shirley-395 Business Center. The property was
sold for approximately $7.6 million in cash resulting in a gain of approximately
$5.9 million. On May 7, 1998, WRIT sold the 5410 Port Royal Business Center. The
property was sold for approximately $1.7 million in cash resulting in a $64,000
gain. WRIT used the proceeds from the sales to invest in other real estate (see
Notes 3 and 7).
NOTE 7: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Distribution
Centers, Apartment Buildings and Shopping Centers. Office Buildings represent
48% 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 20% of real estate rental revenue. These properties provide housing
for families throughout the Washington Metropolitan area. Shopping Centers
represent the remaining 18% of real estate rental revenue and are 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.
10
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended September 30, 1998
-------------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
====================================================================
Total assets $264,543 $89,301 $65,456 $84,036 $14,786 $518,122
====================================================================
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended September 30, 1997
-------------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate rental revenue $8,715 $2,492 $4,474 $3,755 $ - $19,436
Real estate expenses 3,171 483 1,871 907 - 6,432
--------------------------------------------------------------------
Operating income 5,544 2,009 2,603 2,848 - 13,004
Depreciation and amortization 1,241 402 526 470 - 2,639
--------------------------------------------------------------------
Income from real estate 4,303 1,607 2,077 2,378 - 10,365
Other income 490 490
Interest expense (169) (2,034) (2,203)
General and administrative (988) (988)
--------------------------------------------------------------------
Net income $4,303 $1,607 $2,077 $2,209 $(2,532) $7,664
====================================================================
Capital investments $ 976 $ 130 $ 506 $ 535 $ 311 $2,458
====================================================================
</TABLE>
11
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended September 30, 1998
------------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 6,638 6,638
Interest expense (500) (11,984) (12,484)
General and administrative (4,663) (4,663)
--------------------------------------------------------------------
Net income $19,020 $ 6,226 $ 7,638 $ 8,269 $(10,009) $ 31,144
====================================================================
Capital investments $15,985 $32,007 $ 1,814 $ 7,349 $ 1,040 $ 58,195
====================================================================
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended September 30, 1997
-------------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate rental revenue $25,055 $ 7,143 $13,207 $11,632 $ - $57,037
Real estate expenses 9,067 1,487 5,312 2,697 - 18,563
--------------------------------------------------------------------
Operating income 15,988 5,656 7,895 8,935 - 38,474
Depreciation and amortization 3,682 1,129 1,500 1,315 - 7,626
--------------------------------------------------------------------
Income from real estate 12,306 4,527 6,395 7,620 - 30,848
Other income 717 717
Interest expense (509) (6,280) (6,789)
General and administrative (2,945) (2,945)
--------------------------------------------------------------------
Net income $12,306 $ 4,527 $ 6,395 $ 7,111 $(8,508) $21,831
====================================================================
Capital investments $ 3,742 $14,303 $ 1,717 $ 2,768 $ 353 $22,883
====================================================================
</TABLE>
12
<PAGE>
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 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, 1998 Compared to
- -----------------------------------------------------------------------------
the Three Months Ended September 30, 1997
- -----------------------------------------
Total revenues for the third quarter of 1998 increased 35.0% ($6.8 million) to
$26.2 million from $19.4 million in the third quarter of 1997.
For the third quarter of 1998, WRIT's office buildings had increases of 45.8% in
revenues and 50.7% in operating income, over the third quarter of 1997. These
increases were primarily due to the acquisition of 1600 Wilson Boulevard in
October 1997 and 7900 Westpark Drive in November 1997 and increased core
portfolio operating income. The addition of 8230 Boone Boulevard to the office
building sector in September 1998 did not have a significant impact on the
sector's revenues or operating income in the third quarter of 1998 as compared
to the third quarter of 1997. Comparing those office buildings owned by WRIT for
the entire third quarter of 1997 to their results in the third quarter of 1998,
revenue and operating income increased 5.1% and 7.0% respectively, over the
third quarter of 1997. The increases in revenues and operating income were due
to increases in rental rates and occupancy across the sector.
For the third quarter of 1998, WRIT's industrial distribution center revenues
and operating income increased 48.1% and 48.4% respectively, over the third
quarter of 1997. This was primarily due to the acquisitions of Pickett
Industrial Park in October 1997 and Northern Virginia Industrial Park in May
1998 and due to increased core portfolio operating income. The addition of 8900
Telegraph Road to the industrial distribution center sector in September 1998
did not have a significant impact on the sector's revenues or operating income
in the third quarter of 1998 as compared to the third quarter of 1997. Comparing
those industrial distribution centers owned by WRIT for the entire third quarter
of 1997 to their results in the third quarter of 1998, revenue and operating
income increased by 8.0% and 9.0% respectively, over the third quarter of 1997.
These increases were primarily due to increased rental rates and increased
tenant pass through expense recoveries.
For the third quarter of 1998, WRIT's apartment revenues and operating income
increased 17.8% and 16.5% respectively, over the third quarter of 1997. These
increases were primarily due to the acquisition of the Bethesda Hill Apartments
in November 1997. Comparing those apartment buildings owned by WRIT for the
entire third quarter of 1997 to their results in the third quarter of 1998,
revenue increased 1.5% and operating income
13
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
decreased 1.3% from the third quarter of 1997. The increases in revenues were
primarily due to increased rental rates for the sector, offset by decreased
occupancy. The decrease in operating income was primarily caused by increased
property operating expenses.
For the third quarter of 1998, WRIT's shopping center revenues and operating
income increased 21.7% and 25.7% respectively, over the third quarter of 1997.
This was primarily due to the acquisition of 800 South Washington Street in June
1998 and due to increased core portfolio operating income. Comparing those
shopping centers owned by WRIT for the entire third quarter of 1997 to their
results in the third quarter of 1998, revenue and operating income increased by
17.1% and 20.5% respectively, over the third quarter of 1997. These increases
were primarily due to increased rental and occupancy rates, increased percentage
rent and increased tenant pass through expense recoveries.
REAL ESTATE RENTAL REVENUE: Nine Months Ended September 30, 1998 Compared to the
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 1997
- ------------------------------------
Total revenues for the nine months ended September 30, 1998 increased 33.3%
($19.1 million) to $76.2 million from $57.0 million for the nine months ended
September 30, 1997.
For the nine months ended September 30, 1998, WRIT's office buildings had
increases of 50.2% in revenues and 57.3% in operating income, over the nine
months ended September 30, 1997. These increases were primarily due to the
acquisition of 1600 Wilson Boulevard in October 1997 and 7900 Westpark Drive in
November 1997 and increased core portfolio operating income. The addition of
8230 Boone Boulevard to the office building sector in September 1998 did not
have a significant impact on the sector's revenues or operating income in the
first nine months of 1998 as compared to the first nine months of 1997.
Comparing those office buildings owned by WRIT for the entire nine months ended
September 30, 1997 to their results for the nine months ended September 30,
1998, revenue and operating income increased 7.1% and 11.5% respectively, over
the nine months ended September 30, 1997. The increases in revenues and
operating income were due to increases in rental rates and occupancy across the
sector.
For the nine months ended September 30, 1998, WRIT's industrial distribution
center revenues and operating income increased 37.3% and 39.4% respectively,
over the nine months ended September 30, 1997. This was due primarily to the
acquisitions of Ammendale Technology Park in February 1997, Pickett Industrial
Park in October 1997 and Northern Virginia Industrial Park in May 1998. The
addition of 8900 Telegraph Road to the industrial distribution center sector in
September 1998 did not have a significant impact on the sector's revenues or
operating income in the first nine months of 1998 as compared to the first nine
months of 1997. Comparing those industrial distribution centers owned by WRIT
for the entire nine months ended September 30, 1997 to their results for the
nine months ended September 30, 1998, revenue and operating income increased by
7.5% and 10.3% respectively, over the nine months ended September 30, 1997.
These increases are primarily due to increased rental rates, increased tenant
pass through expense recoveries and decreased bad debt expense.
For the nine months ended September 30, 1998, WRIT's apartment revenues and
operating income increased 19.0% and 21.2% respectively, over the nine months
ended June 30, 1997. These increases were primarily due to the acquisition of
the Bethesda Hill Apartments in November 1997 and increased core portfolio
operating income. Comparing those apartment buildings owned by WRIT for the
entire nine months ended September 30, 1997 to
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
their results for the nine months ended September 30, 1998, revenue and
operating income increased 2.3% and 2.7% respectively, over the nine months
ended September 30, 1997. The increases in revenues and operating income were
due primarily to increased rental rates for the sector and decreased operating
expenses.
For the nine months ended September 30, 1998, WRIT's shopping centers had
increases of 11.8% in revenues and 15.2% in operating income over the nine
months ended June 30, 1997. These increases were primarily due to the
acquisition of 800 South Washington Street in June 1998, rental rate and
occupancy gains for the sector as well as decreased operating expenses
(primarily snow removal and utilities due to a milder winter in 1998 as compared
to 1997). Comparing those shopping centers owned by WRIT for the entire nine
months ended September 30, 1997 to their results for the nine months ended
September 30, 1998, revenue and operating income increased by 10.1% and 13.4%
respectively, over the nine months ended September 30, 1997. These increases are
primarily due to increased rental and occupancy rates and increased tenant pass
through expense recoveries.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended September
- --------------------------------------------------------------------------------
30, 1998 Compared to the Three Months Ended September 30, 1997
- --------------------------------------------------------------
Real estate expenses increased $1.9 million or 28.9% to $8.3 million as compared
to $6.4 million for the third quarter of 1997. This increase is primarily due to
expenses relating to properties acquired in 1997 and 1998, as well as increased
administrative and common area maintenance expenses in 1998 as compared to 1997.
Depreciation and amortization expense increased $1.2 million or 47.3% to $3.9
million as compared to $2.6 million for the third quarter of 1997. This is
primarily due to 1997 and 1998 acquisitions of $138.8 million and $45.4 million,
respectively, and 1997 and 1998 capital and tenant improvement expenditures
which totaled $13.9 million and $11.8 million, respectively.
Other income decreased as compared to the third quarter of 1997 due to decreased
investment earnings. This decrease resulted from a lower average balance of cash
and temporary investments in the third quarter of 1998 as compared to the third
quarter of 1997.
Total interest expense was $4.5 million for the third quarter of 1998 as
compared to $2.2 million for the second quarter of 1997. This increase is
primarily attributable to the issuance of $110 million in debt securities in
February 1998. For the third quarter of 1998, notes payable interest expense was
$4.0 million, lines of credit interest expense was $364,000 and mortgage
interest expense was $166,000. For the third quarter of 1997, notes payable
interest expense was $1.9 million, lines of credit interest expense was $163,000
and mortgage interest expense was $169,000.
General and administrative expenses increased $0.5 million to $1.5 million as
compared to $1.0 million for the third quarter of 1997. The increase is
primarily attributable to personnel additions in 1997 and 1998, increased
incentive compensation, increased shareholder expenses and increased
professional fees. For the third quarter of 1998, general and administrative
expenses as a percentage of revenue were 5.7% as compared to 5.1% for the third
quarter of 1997.
Gain on sale of real estate for the nine months ended September 30, 1998 was
$5.9 million, resulting from the sale of Shirley 395 Business Center and 5410
Port Royal Road Business Center.
15
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Nine Months Ended September
- -------------------------------------------------------------------------------
30, 1998 Compared to the Nine Months Ended September 30, 1997
- -------------------------------------------------------------
Real estate expenses increased $4.7 million or 25.1% to $23.2 million as
compared to $18.6 million for the first nine months of 1997. This increase is
primarily due to expenses relating to properties acquired in 1997 and 1998 and
increased common area maintenance expenses, offset by decreased utility
expenses, operating services and snow removal costs resulting from a milder
winter season in 1998 as compared to 1997.
Depreciation and amortization expense increased $3.7 million or 47.8% to $11.3
million as compared to $7.6 million for the first nine months of 1997. This is
primarily due to 1997 and 1998 acquisitions of $138.8 million and $45.4 million,
respectively, and 1997 and 1998 capital and tenant improvement expenditures
which totaled $13.9 million and $11.8 million, respectively.
Total interest expense was $12.5 million for the nine months ended September 30,
1998 as compared to $6.8 million for the nine months ended September 30, 1997.
This increase is primarily attributable to the issuance of $110 million in debt
securities in February 1998 and due to a higher average amount outstanding under
WRIT's lines of credit in the first nine months of 1998. For the nine months
ended September 30, 1998, notes payable interest expense was $10.5 million,
lines of credit interest expense was $1.5 million attributable to advances for
1997 and 1998 acquisitions and mortgage interest expense was $0.5 million. For
the first nine months of 1997, notes payable interest expense was $5.6 million,
lines of credit interest expense was $0.7 million and mortgage interest expense
was $0.5 million.
General and administrative expenses increased $1.8 million to $4.7 million as
compared to $2.9 million for the nine months ended September 30, 1997. The
increase is primarily attributable to personnel additions in 1997 and 1998,
increased incentive compensation, increased shareholder expenses and increased
professional fees. For the first nine months of 1998, general and administrative
expenses as a percentage of revenue were 6.1% as compared to 5.2% for the first
nine months of 1997.
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 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.
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,
1998, WRIT had $30 million outstanding under its lines of credit.
In March 1998, WRIT filed a shelf registration statement with the Securities and
Exchange Commission which
16
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
registered up to 4,500,000 common shares for issuance at WRIT's option. The
shares may be issued in exchange for properties or certain interests in certain
property owning entities. The shelf registration may facilitate the acquisition
of properties in exchange for shares and will remain effective for an indefinite
period as long as WRIT continues to meet certain Securities and Exchange
Commission reporting requirements.
Cash flow from operating activities totaled $36.6 million for the first nine
months of 1998, as a result of net income before gain on sale of real estate of
$25.2 million, depreciation and amortization of $11.3 million, increases in
other assets of $1.6 million and increases in liabilities (other than mortgage
note, senior notes and lines of credit payable) of $1.7 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 1998 was
$49.0 million, including cash received for sale of real estate of $9.2 million
net of real estate acquisitions of $45.4 million, capital improvements to real
estate of $11.8 million and non-real estate capital improvements of $1.0
million.
Net cash provided by financing activities for the first nine months of 1998 was
$8.0 million, including proceeds from debt offering of $102.8 million, line of
credit borrowings of $30 million, line of credit repayments of $95.3 million ,
principal repayments of $104,000 on the mortgage note payable and $29.6 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.
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. As 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. Implementation of
the new system 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 parties 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
17
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 1998, the inventory and priority assignment phases of each
section of the Project had been completed. As described below, WRIT management
is in the process of assessing the Year 2000 compliance of items determined to
be material. 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 being performed by the
Trust.
The Building Operations section consists of the testing of key systems at the
property locations, such as fire detection/ prevention, elevators, heating/
ventilation and air conditioning, telephone and utility services. The assessment
section is on schedule and WRIT estimates that approximately 75% of the
activities relating to this section were completed as of September 30, 1998. 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 March 31, 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.
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 ongoing, and
WRIT believes that all of the significant hardware and software is Year 2000
compliant. Contingency planning for this section is expected to be completed by
June 30, 1999. All Internal Operating Systems activities are expected to be
completed by June 30, 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 will be initiated in the fourth quarter of
1998. These evaluations will be followed by the development of contingency
plans, which are scheduled in the fourth quarter of 1998, with completion by the
second quarter of 1999.
Costs
- -----
WRIT has not had any material expenditures related to the Year 2000 project as
of September 30, 1998. 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,
18
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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."
19
<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
WRIT's annual meeting was held on June 24, 1998. The meeting was adjourned to
September 17, 1998 in order to allow more time to obtain Shareholder votes
regarding the following matters:
1. To approve amendments to the Declaration of Trust to authorize the issuance
of Preferred Shares. This proposal did not pass as it did not receive the
required 70% affirmative vote of outstanding shares. The proposal received
24,659,283 (87% of voted shares and 69% of outstanding shares) votes in
favor, 2,915,869 (10% of voted shares and 8% of outstanding shares) votes
against and 671,800 (3% of voted shares and 2% of outstanding shares) votes
abstaining.
2. To approve an amendment to the Declaration of Trust to authorize the
Trustees to adopt future changes to the Declaration of Trust to preserve
REIT status. This proposal was passed, with 26,376,909 (93% of voted shares
and 74% of outstanding shares) votes in favor, 1,353,017 (5% of voted shares
and 4% of outstanding shares) votes against and 517,659 (2% of voted shares
and 1% of outstanding shares) votes abstaining.
3. To approve amendments to the Declaration of Trust to revise the
super-majority voting provision. This proposal did not pass as it did not
receive the required 70% affirmative vote of outstanding shares. The
proposal received 24,878,826 (88% of voted shares and 69% of outstanding
shares) votes in favor, 2,355,908 (8% of voted shares and 7% of outstanding
shares) votes against and 1,021,840 (4% of voted shares and 3% of
outstanding shares) votes abstaining.
Item 5. Other Information
None
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) Articles of Amendment to Declaration of Trust
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. October 15, 1998--Report pursuant to Item 2 on the acquisition of
Northern Virginia Industrial Park and financial statements of the
acquired property pursuant to Item 7.
21
<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
and Chief Financial Officer
/s/ Laura M. Franklin
_______________________________________
Laura M. Franklin,
Vice President,
Chief Accounting Officer and
Corporate Secretary
Date: November 13, 1998
22
WASHINGTON REAL ESTATE INVESTMENT TRUST
ARTICLES OF AMENDMENT
Washington Real Estate Investment Trust, a Maryland real estate investment
trust (the ATrust@), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: Section 10.1 of the Trust's Declaration of Trust is hereby amended
to read as follows:
The provisions of this Declaration of Trust may be amended by a vote of
the holders of a majority of shares, or by a vote of two-thirds of the
Trustees in any manner necessary to enable the Trust to continue to
qualify as a real estate investment trust under the Code or Title 8 of the
Corporation and Associations Article of the Annotated Code of Maryland.
The Trust may be terminated by the vote of the Trustees with the approval
of the holders of a majority of shares. Notwithstanding the foregoing (and
notwithstanding the fact that some lesser percentage may be permitted by
law), the affirmative vote of the holders of 70% or more of the
outstanding shares of the Trust entitled to vote generally in the election
of Trustees shall be required to amend or repeal Sections 5.8, 5.10, 8.1,
8.2, this Section 10.1, or Article 15 of the Declaration of Trust.
SECOND: Section 14.3 of the Trust's Declaration of Trust is hereby
amended to read as follows:
The Trust may invest in United States government obligations, state or
municipal obligations, mortgages, commercial paper, or similar
investments, as a means of providing for contingencies and future
purchases. Such investments will not be in amounts that would, in the
opinion of counsel for the Trust, disqualify the Trust for treatment as a
Areal estate investment trust@ under the Code and Regulations thereunder.
THIRD: Section 14.6 of the Trust's Declaration of Trust is hereby amended
to read as follows:
The Trust may not (1) engage in any short sale, (2) engage in trading as
compared with investment activities, (3) issue redeemable securities as
that term is defined in the Investment Company Act of 1940, (4) engage in
distribution of securities issued by others, or (5) engage in underwriting
securities of other issuers.
23
<PAGE>
FOURTH: The Board of Trustees of the Trust, at a meeting duly called and
held on April 23, 1998, adopted a resolution which approved the foregoing
amendments to the Declaration of Trust and directed that such amendments be
submitted for approval by the shareholders of the Trust.
FIFTH: The shareholder of the Trust, voting at a meeting duly called and
held on June 24, 1998 and on September 17, 1998, (i) adopted a resolution which
approved and adopted the amendment to Section 10.1 of the Declaration of Trust
by a vote of more than seventy percent of the issued and outstanding shares of
beneficial interest of the Trust entitled to vote thereon and (ii) adopted a
resolution which approved and adopted the amendments to Sections 14.3 and 14.6
of the Declaration of Trust by a vote of a majority of the issued and
outstanding shares of beneficial interest of the Trust entitled to vote thereon.
SIXTH: The undersigned, President and Chief Executive Officer of
Washington Real Estate Investment Trust, hereby acknowledges these Articles of
Amendment to be that act of the Trust and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth therein
are true in all material respects, under the penalties of perjury.
IN WITNESS WHEREOF, the Trust has caused these Articles of Amendment to be
signed in its name and on its behalf by its President and Chief Executive
Officer and attested to by its Secretary on this 21st day of September, 1998.
WASHINGTON REAL ESTATE
ATTEST: INVESTMENT TRUST
By: /s/ Laura M. Franklin By: /s/ Edmund B. Cronin, Jr.
_____________________ ___________________________
Laura M. Franklin Edmund B. Cronin, Jr.
Secretary President and Chief Executive Officer
24
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