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 JUNE 30, 1998 COMMISSION FILE NO. 1-6622
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
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<S><C>
MARYLAND 53-0261100
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
</TABLE>
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 35,692,042
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
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WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
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Page
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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 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
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, 1997 included in the Trust's 1997 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)
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<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
---------------- ---------------
<S><C>
Assets
Real estate at cost $544,135 $504,315
Accumulated depreciation (61,195) (56,015)
---------------- ---------------
Total investment in real estate 482,940 448,300
Cash and temporary investments 8,074 7,908
Rents and other receivables, net of allowance for doubtful
accounts of $693 and $884, respectively 4,034 4,035
Prepaid expenses and other assets 14,818 8,328
---------------- ---------------
$509,866 $468,571
================ ===============
Liabilities
Accounts payable and other liabilities $12,471 $8,068
Tenant security deposits 3,690 3,089
Advance rents 2,283 2,615
Mortgage note payable 7,392 7,461
Lines of credit payable 17,000 95,250
Notes payable 210,000 100,000
---------------- ---------------
252,836 216,483
---------------- ---------------
Minority interest 1,504 -
---------------- ---------------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000,000
shares authorized: 35,683,987 and 35,678,110 shares issued
and outstanding at June 30, 1998 and December 31,
1997, respectively 357 357
Additional paid-in capital 255,169 251,731
---------------- ---------------
255,526 252,088
---------------- ---------------
$509,866 $468,571
================ ===============
</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)
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<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------- ------------ ------------ -----------
<S><C>
Real estate rental revenue $25,413 $19,104 $49,914 $37,602
Real estate expenses (7,812) (6,185) (14,942) (12,132)
------------- ------------ ------------ -----------
17,601 12,919 34,972 25,470
Depreciation and amortization (3,743) (2,557) (7,383) (4,987)
------------- ------------ ------------ -----------
Income from real estate 13,858 10,362 27,589 20,483
Other income 316 157 547 227
Interest expense (4,237) (2,379) (8,015) (4,586)
General and administrative (1,650) (1,001) (3,178) (1,957)
------------- ------------ ------------ -----------
Income before gain on sale of real estate 8,287 7,139 16,943 14,167
------------- ------------ ------------ -----------
Gain on sale of real estate 64 - 5,926 -
------------- ------------ ------------ -----------
Net Income $8,351 $7,139 $22,869 $14,167
============= ============ ============ ===========
Per share information based on the
weighted average number
of shares outstanding
Shares-- Basic 35,685,138 31,821,844 35,684,566 31,751,734
Shares-- Diluted 35,804,994 31,841,843 35,797,620 31,776,162
Net income per share-- Basic $0.23 $0.22 $0.64 $0.45
============= ============ ============ ===========
Net income per share-- Diluted $0.23 $0.22 $0.64 $0.45
============= ============ ============ ===========
Dividends paid $0.28 $0.27 $0.55 $0.53
============= ============ ============ ===========
</TABLE>
See accompanying notes to financial statements
4
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WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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<CAPTION>
(Unaudited)
Six Months Ended June 30,
1998 1997
---------- -----------
<S><C>
Cash Flow From Operating Activities
Net income $22,869 $14,167
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (5,926) -
Depreciation and amortization 7,383 4,987
Changes in other assets 388 (672)
Changes in other liabilities 4,675 723
---------- -----------
Net cash provided by operating activities 29,389 19,205
---------- -----------
Cash Flow From Investing Activities
Capital improvements to real estate (7,847) (6,650)
Non-real estate capital improvements (320) (42)
Real estate acquisitions (35,342) (13,732)
Cash received for sale of real estate 9,239 -
---------- -----------
Net cash used in investing activities (34,270) (20,424)
---------- -----------
Cash Flow From Financing Activities
Dividends paid (19,626) (16,869)
Net proceeds from debt offering 102,797 -
Borrowings - Lines of credit 17,000 18,000
Repayments - Lines of credit (95,250) -
Principal payments - Mortgage note payable (69) (63)
Share options exercised 195 372
---------- -----------
Net cash provided by financing activities 5,047 1,440
---------- -----------
Net increase (decrease) in cash and temporary investments 166 221
Cash and temporary investments at beginning of year 7,908 1,676
---------- -----------
Cash and temporary investments at end of period $8,074 $1,897
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the first six months for interest $4,690 $4,409
========== ===========
</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 SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In Thousands)
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Additional Shareholders'
Shares Par Value Paid in Capital Equity
----------------- -------------- --------------- ------------
<S><C>
Balance, December 31, 1997 35,678 $357 $251,731 $252,088
Net income 22,869 22,869
Dividends (19,626) (19,626)
Share Options Exercised 14 0 195 195
----------------- -------------- --------------- ------------
Balance, June 30, 1998 35,692 $357 $255,169 $255,526
================= ============== =============== ============
</TABLE>
See accompanying notes to financial statements
6
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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.
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 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 other income (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
7
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (Unaudited)
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 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 six months ended June 30, 1998.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments includes cash equivalents with original
maturities of 90 days or less.
8
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (Unaudited)
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 3: REAL ESTATE INVESTMENTS
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C., Virginia and Delaware as follows:
June 30, 1998
(In Thousands)
--------------
Office buildings $274,230
Industrial distribution centers 94,060
Apartment buildings 81,279
Shopping centers 94,566
--------
$544,135
========
Properties acquired by WRIT during the first six months of 1998 are as follows:
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Acquisition
Acquisition Property Property Rentable Cost (in
Date Name Type Square Feet thousands)
- --------------------------------------------------------------------------------------------
<S><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
</TABLE>
NOTE 4: UNSECURED LINES OF CREDIT PAYABLE
As of June 30, 1998, WRIT had two unsecured credit commitments in the amount of
$50 million and $25 million. $17 million was outstanding under the credit
commitments as of June 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 six months ended June 30,
1998 bore interest at rates ranging from 6.39% 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, 1999.
9
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (Unaudited)
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 June 30, 1998, $58 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 June 30, 1998.
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 June 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%. 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, including the settlement of certain interest rate lock
agreements, 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
49% of real estate rental revenue and provide office space for various types of
businesses. Industrial Distribution Centers represent 13% 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 17% 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 a consolidation 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
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (Unaudited)
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<CAPTION>
(in thousands)
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
-------------------------------------------------------------------
<S><C>
Real estate rental revenue $12,555 $3,256 $5,290 $4,312 $ - $25,413
Real estate expenses 4,219 655 2,014 924 - 7,812
------------------------------------------------------------------
Operating income 8,336 2,601 3,276 3,388 - 17,601
Depreciation and amortization 2,061 542 648 492 - 3,743
------------------------------------------------------------------
Income from real estate 6,275 2,059 2,628 2,896 - 13,858
Other income 316 316
Interest expense (167) (4,070) (4,237)
General and administrative (1,650) (1,650)
==================================================================
Net income before gain on sale
of real estate $6,275 $2,059 $2,628 $2,729 $(5,404) $8,287
==================================================================
Capital investments $3,292 $29,594 $792 $6,414 $114 $40,206
==================================================================
Total assets $254,563 $87,491 $64,992 $83,476 $19,344 $509,866
==================================================================
<CAPTION>
(in thousands)
THREE MONTHS ENDED JUNE 30, 1997
--------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
------------------------------------------------------------------
Real estate rental revenue $8,282 $2,486 $4,394 $3,942 $ - $19,104
Real estate expenses 2,987 552 1,737 909 - 6,185
------------------------------------------------------------------
Operating income 5,295 1,934 2,657 3,033 - 12,919
Depreciation and amortization 1,223 407 488 439 - 2,557
------------------------------------------------------------------
Income from real estate 4,072 1,527 2,169 2,594 - 10,362
Other income 157 157
Interest expense (170) (2,209) (2,379)
General and administrative (1,001) (1,001)
==================================================================
Net income $4,072 $1,527 $2,169 $2,424 $(3,053) $7,139
==================================================================
Capital investments $993 $242 $790 $599 $26 $2,650
==================================================================
</TABLE>
11
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
(in thousands)
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
------------------------------------------------------------------
<S><C>
Real estate rental revenue $24,917 $6,117 $10,449 $8,431 $ - $49,914
Real estate expenses 8,095 1,212 3,916 1,719 - 14,942
------------------------------------------------------------------
Operating income 16,822 4,905 6,533 6,712 - 34,972
Depreciation and amortization 4,108 1,002 1,285 988 - 7,383
------------------------------------------------------------------
Income from real estate 12,714 3,903 5,248 5,724 - 27,589
Other income 547 547
Interest expense (334) (7,681) (8,015)
General and administrative (3,178) (3,178)
==================================================================
Net income $12,714 $3,903 $5,248 $5,390 $(10,312) $16,943
==================================================================
Capital investments $5,220 $29,898 $1,097 $6,975 $320 $43,510
==================================================================
<CAPTION>
(in thousands)
SIX MONTHS ENDED JUNE 30, 1997
------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
------------------------------------------------------------------
Real estate rental revenue $16,342 $4,650 $8,733 $7,877 $ - $37,602
Real estate expenses 5,897 1,004 3,441 1,790 - 12,132
------------------------------------------------------------------
Operating income 10,445 3,646 5,292 6,087 - 25,470
Depreciation and amortization 2,428 727 974 858 - 4,987
------------------------------------------------------------------
Income from real estate 8,017 2,919 4,318 5,229 - 20,483
Other income 227 227
Interest expense (340) (4,246) (4,586)
General and administrative (1,957) (1,957)
==================================================================
Net income $8,017 $2,919 $4,318 $4,889 $(5,976) $14,167
==================================================================
Capital investments $2,846 $14,173 $1,195 $2,168 $42 $20,424
==================================================================
</TABLE>
12
<PAGE>
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 June 30, 1998 Compared to the
Three Months Ended June 30, 1997
Total revenues for the second quarter of 1998 increased 33.0% ($6.3 million) to
$25.4 million from $19.1 million in the second quarter of 1997.
For the second quarter of 1998, WRIT's office buildings had increases of 51.6%
in revenues and 57.4% in operating income, over the second 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. Comparing those office buildings owned by WRIT for
the entire second quarter of 1997 to their results in the second quarter of
1998, revenue and operating income increased 8.2% and 11.8% respectively, over
the second quarter of 1997. The increases in revenues and operating income were
due to increases in rental rates and occupancy across the sector and decreased
bad debt expense.
For the second quarter of 1998, WRIT's industrial distribution center revenues
and operating income increased 31.0% and 34.4% respectively, over the second
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. Comparing those
industrial distribution centers owned by WRIT for the entire second quarter of
1997 to their results in the second quarter of 1998, revenue and operating
income increased by 15.2% and 19.6% respectively, over the second quarter of
1997. These increases were primarily due to increased rental rates and increased
tenant pass through expense recoveries.
For the second quarter of 1998, WRIT's apartment revenues and operating income
increased 20.4% and 23.3% respectively, over the second quarter of 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 second quarter of 1997 to their
results in the second quarter of 1998, revenue and operating income increased
3.0% and 3.9% respectively, over the second quarter of 1997. The increases in
revenues and operating income were primarily due to increased rental rates for
the sector.
For the second quarter of 1998, WRIT's shopping centers had increases of 9.4% in
revenues and 11.7% in operating income over the second quarter of 1997. These
increases were primarily due to rental rate and occupancy gains for the sector.
The addition of 800 South Washington Street to the shopping center sector in
June
13
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1998 did not have a significant impact on the sector's revenues or operating
income in the second quarter of 1998 as compared to the second quarter of 1997.
REAL ESTATE RENTAL REVENUE: Six Months Ended June 30, 1998 Compared to the Six
Months Ended June 30, 1997
Total revenues for the six months ended June 30, 1998 increased 32.7% ($12.3
million) to $49.9 million from $37.6 million for the six months ended June 30,
1997.
For the six months ended June 30, 1998, WRIT's office buildings had increases of
52.5% in revenues and 61.1% in operating income, over the six months ended June
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. Comparing those office buildings owned by WRIT
for the entire six months ended June 30, 1997 to their results for the six
months ended June 30, 1998, revenue and operating income increased 8.2% and
13.1% respectively, over the six months ended June 30, 1997. The increases in
revenues and operating income were due to increases in rental rates and
occupancy across the sector and decreased bad debt expense.
For the six months ended June 30, 1998, WRIT's industrial distribution center
revenues and operating income increased 31.5% and 34.5% respectively, over the
six months ended June 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 and due to increased core
portfolio operating income. Comparing those industrial distribution centers
owned by WRIT for the entire six months ended June 30, 1997 to their results for
the six months ended June 30, 1998, revenue and operating income increased by
9.7% and 26.3% respectively, over the six months ended June 30, 1997. These
increases are primarily due to increased rental rates, increased tenant pass
through expense recoveries and decreased common area maintenance costs.
For the six months ended June 30, 1998, WRIT's apartment revenues and operating
income increased 19.7% and 23.4% respectively, over the six 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 six months
ended June 30, 1997 to their results for the six months ended June 30, 1998,
revenue and operating income increased 2.8% and 2.4% respectively, over the six
months ended June 30, 1997. The increases in revenues and operating income were
due primarily to increased rental rates for the sector and decreased operating
expense.
For the six months ended June 30, 1998, WRIT's shopping centers had increases of
7.0% in revenues and 10.3% in operating income over the six months ended June
30, 1997. These increases were primarily due to 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). The addition
of 800 South Washington Street to the shopping center sector in June 1998 did
not have a significant impact on the sector's revenues or operating income in
the six months ended June 30, 1998 as compared to the six months ended June 30,
1997.
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended June 30,
1998 Compared to the Three Months Ended June 30, 1997
Real estate expenses increased $1.6 million or 26.3% to $7.8 million as compared
to $6.2 million for the second quarter of 1997. This increase is primarily due
to expenses relating to properties acquired in 1997 and 1998, as well as
increased utility expenses in 1998 as compared to 1997.
Depreciation and amortization expense increased $1.2 million or 46.4% to $3.7
million as compared to $2.6 million for the second quarter of 1997. This is
primarily due to 1997 and 1998 acquisitions of $138.8 million and $35.3 million,
respectively, and 1997 and 1998 capital and tenant improvement expenditures
which totaled $13.9 million and $7.8 million, respectively.
Other income increased as compared to the second quarter of 1997 due to
increased investment earnings. This increase resulted from a higher average
balance of cash and temporary investments in the second quarter of 1998 as
compared to the second quarter of 1997.
Total interest expense was $4.2 million for the second quarter of 1998 as
compared to $2.4 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 second quarter of 1998, notes payable interest expense
was $3.9 million, lines of credit interest expense was $139,000 and mortgage
interest expense was $167,000. For the first quarter of 1997, notes payable
interest expense was $1.9 million, lines of credit interest expense was $341,000
and mortgage interest expense was $170,000.
General and administrative expenses increased $0.6 million to $1.6 million as
compared to $1.0 million for the second quarter of 1997. The increase is
primarily attributable to personnel additions in 1997 and 1998, increased
incentive compensation, and increased professional fees. For the second quarter
of 1998, general and administrative expenses as a percentage of revenue were
6.5% as compared to 5.2% for the second quarter of 1997.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Six Months Ended June 30,
1998 Compared to the Six Months Ended June 30, 1997
Real estate expenses increased $2.8 million or 23.2% to $14.9 million as
compared to $12.1 million for the first six months of 1997. This increase is
primarily due to expenses relating to properties acquired in 1997, 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 $2.4 million or 48.1% to $7.4
million as compared to $5.0 million for the first six months of 1997. This is
primarily due to 1997 and 1998 acquisitions of $138.8 million and $35.3 million,
respectively, and 1997 and 1998 capital and tenant improvement expenditures
which totaled $13.9 million and $7.8 million, respectively.
Other income increased as compared to the first six months of 1997 due to
increased investment earnings. This increase resulted from a higher average
balance of cash and temporary investments in the first six months of 1998
15
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
as compared to the first six months of 1997.
Total interest expense was $8.0 million for the six months ended June 30, 1998
as compared to $4.6 million for the six months ended June 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 six months of 1998. For the six months ended
June 30, 1998, notes payable interest expense was $6.2 million, lines of credit
interest expense was $1.1 million attributable to advances for 1997 acquisitions
and mortgage interest expense was $334,000. For the first six months of 1997,
notes payable interest expense was $3.6 million, lines of credit interest
expense was $508,000 and mortgage interest expense was $340,000.
General and administrative expenses increased $1.2 million to $3.2 million as
compared to $2.0 million for the six months ended June 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 six months of 1998, general and administrative
expenses as a percentage of revenue were 6.4% as compared to 5.2% for the first
six 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 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.
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 June 30, 1998,
WRIT had $17 million outstanding under its lines of credit.
In March 1998, WRIT filed a shelf registration statement with the Securities and
Exchange Commission which 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 $29.4 million for the first six
months of 1998, as a result of net income before gain on sale of real estate of
$16.9 million, depreciation and amortization of $7.4 million, decreases in other
assets of $388,000 and increases in liabilities (other than mortgage note,
senior notes and lines of credit payable) of $4.7 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 six months of 1998 was $34.3
million, including cash received for sale of real estate of $9.2 million net of
real estate acquisitions of $35.3 million, capital improvements to real estate
of $7.8 million and non-real estate capital improvements of $320,000.
16
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net cash provided by financing activities for the first three months of 1998 was
$4.9 million, including proceeds from debt offering of $102.8 million, line of
credit borrowings of $17 million, line of credit repayments of $95.3 million,
principal repayments of $69,000 on the mortgage note payable and $19.6 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.
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 June 30, 1998, WRIT
Limited Partnership has acquired 15 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.
YEAR 2000
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.
WRIT has implemented a new 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 is reviewing the
remaining operating systems, including building operations, to determine if
there is any Year 2000 issues related to such systems.
17
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
In connection with the acquisition of Northern Virginia
Industrial Park ("NVIP"), WRIT formed WRIT-NVIP L.L.C.
for the purpose of owning and operating nine of the
buildings that comprise NVIP. WRIT-NVIP L.L.C. is a
majority owned, consolidated subsidiary of WRIT. In
connection with the formation of WRIT-NVIP L.L.C. and
the purchase of NVIP, WRIT issued 85,500 Limited
Liability Corporate Shares of WRIT-NVIP L.L.C. to one of
NVIP's former owners. The shares are exchangeable,
subject to certain limitations, for either cash or WRIT
common shares after one year. The shares were issued in
a private transaction exempt from registration under the
Securities Act pursuant to Section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At WRIT's annual meeting of the Shareholders on June 24, 1998, the
following members were elected to the Board of Trustees for a period of
three years:
Affirmative Negative
Votes Votes
-----------------------------
Edmund B. Cronin, Jr. 32,470,776 556,809
John P. McDaniel 32,608,975 418,616
David M. Osnos 32,595,087 432,504
John M. McDaniel was elected as a successor Trustee for Benjamin H.
Dorsey, who attained the age of 74 and retired from the Board per the
trust's By-Laws. Trustees whose term of office continued after the
meeting were Arthur A. Birney, William N. Cafritz, John M. Derrick, Jr.
and Stanley P. Snyder
The shareholders approved an amendment to the Declaration of Trust to
modify certain investment policies with 23,145,691 votes in favor,
1,178,168 votes opposed and 531,635 votes abstained.
The annual 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.
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.
3. To approve amendments to the Declaration of Trust to revise the
super-majority voting provision.
Item 5. Other Information
None
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
19
<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: August 14, 1998
20
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