SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL 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 THE FISCAL YEAR ENDED December 31, 1998 COMMISSION FILE NO. 1-6622
WASHINGTON REAL ESTATE INVESTMENT TRUST
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 53-0261100
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
6110 EXECUTIVE BOULEVARD, SUITE 800, ROCKVILLE, MARYLAND 20852
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (301) 984-9400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of exchange on which registered
- --------------------------------------------------------------------------------
Shares of Beneficial Interest New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of February 9, 1999, 35,709,789 Shares of Beneficial Interest were
outstanding and the aggregate market value of such shares held by non-affiliates
of the registrant was approximately $613,762,000 (based on the closing price of
the stock on February 9, 1999).
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference from the Trust's 1999
Notice of Annual Meeting and Proxy Statement.
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
1998 FORM 10-K ANNUAL REPORT
INDEX
PART I Page
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management 19
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 20
Signatures 23
<PAGE>
PART I
ITEM 1. BUSINESS
Washington Real Estate Investment Trust ("WRIT" or the "Trust") is a
self-administered qualified equity real estate investment trust ("REIT"). The
Trust's business consists of the ownership and operation of income-producing
real properties. The Trust has a fundamental strategy of regional focus,
diversification by property type and conservative financial management.
WRIT has elected to qualify as a REIT under the Internal Revenue Code ("the
Code"). Accordingly, WRIT is relieved of Federal income taxes provided that
capital gains and at least 95% of its ordinary income are distributed to
shareholders in the form of dividends and that it complies with all REIT related
aspects of the Code. Over the last five years, dividends paid per share have
been $1.11 for 1998, $1.07 for 1997, $1.03 for 1996, $.99 for 1995, and $.92 for
1994. The indicated annualized dividend rate for 1999, based upon the March 31,
1999 dividend, is $1.12. Gains on sale of real estate of $6.8 million in 1998
were tax deferred. Such gains were used to acquire real estate assets and will
not be distributed.
WRIT's geographic focus is based on two principles:
1. Real estate is a local business and is much more effectively selected
and managed by owners located and expert in the region.
2. Geographic markets deserving of focus must be among the nation's best
markets with a strong primary industry foundation, but be diversified
enough to withstand downturns in its primary industry.
WRIT considers markets to be local if they can be reached from the operations
center within two hours by car. WRIT's Washington centered market reaches north
to Philadelphia, Pennsylvania and south to Richmond, Virginia. While WRIT has
historically focused most of its investments in the Greater Washington-Baltimore
Region, in order to maximize acquisition opportunities, WRIT will consider
investments within the two-hour radius described above. WRIT also will consider
opportunities to duplicate its Washington focused approach in other geographic
markets which meet the criteria described above.
All of WRIT's Trustees, officers and employees live and work in the Greater
Washington-Baltimore region and WRIT's officers average over 18 years of
experience in this region.
The Greater Washington-Baltimore region is the nation's fourth largest with a
population exceeding 7.4 million. Combining the Richmond to Philadelphia areas
with the Washington-Baltimore area, the total population is approximately 13.4
million. The Washington-Baltimore region is ranked first in the U.S. in median
household income and percentage of population with education at the
undergraduate and postgraduate level.
While the Federal government is the foundation of the region's economy, private
sector job growth has resulted in total non-farm employment in the Washington
area growing 100% from 1.6 million jobs in 1970 to 3.2 million jobs in 1998,
while the percentage of Federal government civilian employment in the region
decreased from 28.4% to 11.4%. Since January 1980, seasonally adjusted
unemployment in the Washington area has averaged 4.0% with November 1998
unemployment standing at 2.9%.
The Greater Washington-Baltimore region is a leader in the rapidly growing
technology/infocom and biotech/health care industries. It is the center of the
U.S. Space Commerce/Satellite Industry with Comsat, GTE Spacenet, Intelsat,
Lockheed-Martin and NASA all headquartered here in the region. The region has
the nation's second highest concentration of technology companies and the third
highest concentration of biotech companies.
3
<PAGE>
This region serves as the headquarters for several of the largest U.S. and
international financial institutions including the World Bank, International
Monetary Fund, Inter-American Development Bank, Export-Import Bank, Federal
National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corp.
(Freddie Mac) and Student Loan Marketing Association (Sallie Mae).
Other major public companies headquartered in the region include Mobil Oil, MCI
Worldcom, USAirways, America Online, Marriott International, Lockheed-Martin,
and Gannett. The region is the second most popular tourist destination in the
world. Most importantly, the Mid-Atlantic region is known as a job center, with
solid educational opportunities and easy access to leisure time activities.
While the region has clearly diversified beyond the Federal government town of
the past, the Federal government is still the foundation of the region's
economy. Despite a 15.0% decrease in direct Federal civilian employment from
1994 through 1998, the region's unemployment rate never exceeded a seasonally
adjusted 4.5% and was at 2.9% in November 1998. This is due to both the strength
and diversity of this local economy, increased job growth opportunities in the
private sector and substantial local increases in Federal procurement (purchases
of goods and services).
Though Federal procurement spending has decreased nationally, it has become more
concentrated and has increased in the Greater Washington-Baltimore region
because Federal contractors have moved closer to their Federal clients to be
more competitive. Federal procurement decreased by 7.1% nationally from 1991 to
1997, but increased in the Washington area by 51.7%.
As of December 31, 1998, WRIT owned a diversified portfolio consisting of 12
retail centers, 21 office buildings, eight apartment buildings and 15 industrial
distribution/flex properties. WRIT's principal objective is to invest in high
quality real estate in prime locations, then proactively manage, lease, and
develop ongoing capital improvement programs to improve their economic
performance. The percentage of total real estate rental revenue by property
group for 1998, 1997, and 1996, and the percent leased as of December 31, 1998
were as follows:
Real Estate Rental Revenue
Percent Leased --------------------------
December 31, 1998 1998 1997 1996
-------------------------- ---- ---- ----
99% Office buildings 50% 45% 44%
96% Retail centers 17 20 23
97% Apartment buildings 20 23 22
92% Industrial/flex properties 13 12 11
---- ---- ----
100% 100% 100%
On a combined basis, WRIT's portfolio was 96% occupied in 1998, 95% occupied in
1997 and 93% occupied in 1996.
Total revenue was $103.6 million for 1998, $79.4 million for 1997, $65.5 million
for 1996 and $52.6 million for 1995. From 1995 through 1998, WRIT acquired nine
office buildings, two retail centers, three apartment buildings and nine
industrial distribution/flex properties for a total of 22 properties. These
acquisitions were the primary reason for the shifting of each group's percentage
of total revenue reflected above. In 1998, WRIT sold a retail center and two
industrial/flex properties. No single tenant accounted for more than 3.96% of
revenue in 1998, 3.04% of revenue in 1997, 2.39% in 1996 and 2.05% in 1995.
Various agencies of the U.S. government are counted separately and include the
Department of Commerce, Immigration and Naturalization Service, U.S. Postal
Service, Social Security Administration and U.S. Patent Office. All Federal
government tenants in the aggregate accounted for approximately 3.09% of WRIT's
1998 total revenue. The larger non-Federal government tenants include Crestar
Bank, District of Columbia Metropolitan Police Department, Electronic Data
Systems, Giant Food, OAO Corporation, Pepsi Cola, Sun Microsystems, The American
Red Cross, Wang Laboratories, and Xerox.
4
<PAGE>
As of December 31, 1998, and for the year then ended, the 7900 Westpark office
building accounted for 13% of total assets based upon book value and 10% of
total revenues. No other single property accounted for more than 10% of total
assets or total revenues.
During 1998 and prior, the actual day-to-day property management functions at
the properties owned by the Trust were carried out by an independent management
company whose only client was WRIT. No WRIT Trustee or officer was a director or
owned any interest in the management company. Effective December 31, 1998, WRIT
acquired substantially all of the operations of the management company and took
over the property management functions of the properties. See further discussion
in the notes to WRIT's financial statements.
The Trust expects to continue investing in additional income producing
properties. WRIT invests only in properties which management believes will
increase in income and value. WRIT's properties compete for tenants with other
properties throughout the respective areas in which they are located. All
properties compete for tenants on the basis of location, quality and rental
rates.
WRIT makes capital improvements on an ongoing basis to its properties for the
purpose of maintaining and increasing their values and income. Major
improvements and/or renovations to the properties in 1998 are discussed on page
8.
Further description of the property groups is contained in Item 2, Properties
and in Schedule III. Reference is also made to Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The number of persons employed by the Trust was 278 as of February 9, 1999,
including 236 persons engaged in property management functions and 42 persons
engaged in corporate, financial, leasing, and asset management functions.
ITEM 2. PROPERTIES
The schedule on the following page lists the Trust's real estate investment
portfolio as of December 31, 1998. The total number of properties owned was 56
at that date. On February 5, 1999, WRIT sold two office buildings and one
industrial distribution/flex property.
As of December 31, 1998, the percent leased is the percentage of net rentable
space for which fully executed leases exist and may include signed leases for
space not yet occupied by the tenant.
Cost information is included in Schedule III to WRIT's financial statements
included in this Form 10-K Annual Report.
5
<PAGE>
<TABLE>
SCHEDULE OF PROPERTIES
Percent
Year Year Net Rentable* Leased
Properties Location Acquired Constructed Square Feet 12/31/98
- --------------------------------------------- ------------------- ---------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Office Buildings
- ----------------
10400 Connecticut Avenue Kensington, MD 1979 1965 65,000 95%
1901 Pennsylvania Avenue Washington, D.C. 1977 1960 97,000 100%
51 Monroe Street Rockville, MD 1979 1975 210,000 99%
444 N. Frederick Avenue** Gaithersburg, MD 1989 1981 66,000 98%
7700 Leesburg Pike Falls Church, VA 1990 1976 145,000 98%
Arlington Financial Center** Arlington, VA 1992 1963 51,000 100%
515 King Street Alexandria, VA 1992 1966 78,000 100%
The Lexington Building Rockville, MD 1993 1970 47,000 100%
The Saratoga Building Rockville, MD 1993 1977 59,000 97%
Brandywine Center Rockville, MD 1993 1969 35,000 100%
Tycon Plaza II Vienna, VA 1994 1981 131,000 100%
Tycon Plaza III Vienna, VA 1994 1978 152,000 91%
6110 Executive Boulevard Rockville, MD 1995 1971 199,000 99%
1220 19th Street Washington, D.C. 1995 1976 104,000 100%
Maryland Trade Center I Greenbelt, MD 1996 1981 191,000 99%
Maryland Trade Center II Greenbelt, MD 1996 1984 159,000 99%
1600 Wilson Boulevard Arlington, VA 1997 1973 167,000 99%
7900 Westpark Drive McLean, VA 1997 1972/1986 478,000 100%
8230 Boone Blvd. Vienna, VA 1998 1981 58,000 100%
Woodburn Medical Park I Annandale, VA 1998 1984 71,000 97%
Woodburn Medical Park II Annandale, VA 1998 1988 96,000 99%
-------- -----
Subtotal 2,659,000 99%
========= =====
Retail Centers
- --------------
Concord Centre Springfield, VA 1973 1960 76,000 98%
Bradlee Alexandria, VA 1984 1955 168,000 91%
Claremont Salisbury, MD 1976 1965 40,000 88%
Chevy Chase Metro Plaza Washington, D.C. 1985 1975 51,000 100%
Prince William Plaza Woodbridge, VA 1968 1967 55,000 72%
Takoma Park Takoma Park, MD 1963 1962 59,000 100%
Westminster Westminster, MD 1972 1969 165,000 67%
Wheaton Park Wheaton, MD 1977 1967 71,000 100%
Montgomery Village Center Gaithersburg, MD 1992 1969 196,000 100%
Shoppes of Foxchase Alexandria, VA 1994 1960 128,000 100%
Frederick County Square Frederick, MD 1995 1973 233,000 99%
800 S. Washington Street Alexandria, VA 1998 1955/1959 45,000 96%
-------- -----
Subtotal 1,287,000 96%
========= =====
Apartment Buildings/# units
- ---------------------------
Country Club Towers/227 Arlington, VA 1969 1965 276,000 92%
Munson Hill Towers/279 Falls Church, VA 1970 1963 340,000 96%
Park Adams/200 Arlington, VA 1969 1959 210,000 97%
Roosevelt Towers/191 Falls Church, VA 1965 1964 229,000 99%
3801 Connecticut Avenue/307 Washington, D.C. 1963 1951 242,000 100%
The Ashby at McLean/250 McLean, VA 1996 1982 349,000 97%
Walker House Apartments/196 Gaithersburg, MD 1996 1971 148,000 94%
Bethesda Hills Apartments/195 Bethesda, MD 1997 1986 226,000 97%
-------- ---
Subtotal (1,845 units) 2,020,000 97%
========= ===
Industrial Distribution/Flex Properties
- ---------------------------------------
Pepsi-Cola Distribution Center Forestville, MD 1987 1971 69,000 100%
Capitol Freeway Center Washington, D.C. 1974 1940 145,000 100%
Department of Commence** Springfield, VA 1971 1964 105,000 100%
Fullerton Business Center Springfield, VA 1985 1980 103,000 91%
V Street Distribution Center Washington, D.C. 1973 1960 31,000 100%
Charleston Business Center Rockville, MD 1993 1973 85,000 100%
Tech 100 Industrial Park Elk Ridge, MD 1995 1990 167,000 100%
Crossroads Distribution Center Elk Ridge, MD 1995 1987 85,000 100%
The Alban Business Center Springfield, VA 1996 1981/1982 87,000 100%
The Earhart Building Chantilly, VA 1996 1987 92,000 100%
Ammendale Technology Park I Beltsville, MD 1997 1985 167,000 89%
Ammendale Technology Park II Beltsville, MD 1997 1986 108,000 100%
Pickett Industrial Park Alexandria, VA 1997 1973 246,000 84%
Northern Virginia Industrial Park Lorton, VA 1998 1968/1991 790,000 85%
8900 Telegraph Road Lorton, VA 1998 1985 32,000 87%
--------- ---
Subtotal 2,312,000 92%
========= ===
TOTAL 8,278,000
=========
</TABLE>
*Apartment buildings are presented in gross square feet.
**Property was sold subsequent to December 31, 1998.
6
<PAGE>
OFFICE BUILDINGS
Operating income in WRIT's core group of office buildings (excluding 1997 and
1998 acquisitions) increased 11% from 1997 to 1998. This increase was a result
of significant occupancy gains and strong rental rate growth throughout the
sector. WRIT's office markets continue to tighten and, while there is an
increased amount of office development underway in the market, management
anticipates that this sector will continue to be strong for WRIT in 1999.
During 1998, WRIT's office building revenues and operating income increased by
43% and 48%, respectively, over 1997. These increases were primarily due to 1997
acquisitions (1600 Wilson Boulevard & 7900 Westpark Drive) and 1998 acquisitions
(8230 Boone Boulevard and Woodburn Medical Park I and II) combined with the 11%
core group operating income increase described above.
Economic occupancy rates for the core group of office buildings averaged 96% in
1998 compared to 94% in 1997.
Rental rate increases of 5% for the sector were the result of increases at
nearly all of the properties. During 1998, WRIT executed new office leases for
676,964 square feet of office space at an average face rent increase of 11% on a
non-straight line basis. The current average market rate for 434,229 square feet
of office space leases expiring during 1999 exceed the average expiring lease
rates by over 17% (market rent is estimated to be over $23.00 per square foot
compared to $19.87 per square foot current rent on a non-straight line basis).
Further details about the performance of the office building sector in 1997 and
1998 are provided in Management's Discussion and Analysis commencing on page 12.
INDUSTRIAL/FLEX PROPERTIES
During 1998, WRIT's industrial/flex properties center revenues and operating
income increased by 37% and 39%, respectively, over 1997. These increases were
primarily due to 1997 acquisitions (Ammendale Technology Park I & II and Pickett
Industrial Park) and 1998 acquisitions (Northern Virginia Industrial Park and
8900 Telegraph Road).
Operating income in WRIT's core group of industrial/flex properties (excluding
1997 and 1998 acquisitions) increased 8%. Occupancy rates for the core group of
industrial/flex properties averaged 98% in 1998 compared to 96% in 1997 and
rental rates increased 4% in 1998.
Further details about the performance of the industrial/flex properties sector
in 1997 and 1998 are provided in Management's Discussion and Analysis commencing
on page 12.
RETAIL CENTERS
During 1998, WRIT's retail center revenues and operating income increased by 13%
and 17% respectively over 1997. These increases were primarily due to the
acquisition of 800 South Washington Street retail center in 1998, occupancy
gains and rental rate growth throughout the sector, partially offset by
increased bad debts.
Economic occupancy rates for the retail center sector averaged 94% in 1998 and
1997. Retail center rental rates increased 6% in 1998 over 1997 as a result of
WRIT executing leases for 261,248 square feet of space at an average rental rate
increase of over 6%.
Further details about the performance of the retail center sector in 1997 and
1998 are provided in Management's Discussion and Analysis commencing on page 12.
7
<PAGE>
APARTMENT BUILDINGS
During 1998, WRIT's apartment revenues and operating income increased by 17% and
20% respectively over 1997. These increases were primarily due to the 1997
acquisition of Bethesda Hill Apartments.
WRIT's apartment sector continued its five-year run of steady growth in core
group operating income (excluding the Bethesda Hill Apartments acquired in 1997)
with an increase of 5%. This increase was the result of continued high occupancy
levels combined with 4% rental rate increases throughout the group. Economic
occupancy rates for the core group of apartments (excluding the Bethesda Hill
Apartments acquired in 1997) averaged 96% in 1998 and 1997.
Further details about the performance of the apartment sector in 1997 and 1998
are provided in Management's Discussion and Analysis commencing on page 12.
PROPERTY EXPANSIONS & MAJOR RENOVATIONS
BRADLEE SHOPPING CENTER
This major renovation coincides with the retenanting of the expired GC Murphy
lease space and the conversion of the Roy Rogers to a newly completed free
standing McDonalds. As of year end 1998, the renovation is nearly complete, the
McDonald's is open for business and WRIT has leased 19,511 of the 26,640 former
GC Murphy space. This new lease is for an initial rent of $14.50 per square
foot, which is approximately six times the GC Murphy rent of $2.42 per square
foot. Through December 31, 1998, costs of $1.3 million had been incurred
relating to this project. WRIT has commitments of approximately $0.6 million to
complete the project.
7900 WESTPARK DRIVE
In 1999, WRIT expects to complete construction of a 49,000 square foot office
space addition to its 7900 Westpark Drive office building in McLean, Virginia.
This addition commenced in 1998 and is being built over the existing structured
parking deck, similar to the Trust's 1996 addition at 7700 Leesburg Pike. This
addition is 100% preleased. Through December 31, 1998, cost of $1.6 million had
been incurred relating to this project. WRIT has commitments of approximately
$4.0 million to complete the project.
PROPERTY DISPOSITIONS
During 1998, WRIT sold three real estate properties: Shirley I-395 Business
Center, Ravensworth Center, and Dover Mart retail center. The gains on the sales
of these properties were $6.8 million. Net proceeds from the sales of these
properties of $10.8 million were used to invest in other real estate properties
acquired by WRIT in 1998 and 1999.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
---------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Effective January 4, 1999, the Trust's shares are traded on the New York Stock
Exchange.
From 1971 through January 3, 1999, the Trust's shares were traded on the
American Stock Exchange. There are approximately 37,000 shareholders. The
Trust's shares were split 3-for-1 in March 1981, 3-for-2 in July 1985, 3-for-2
in December 1988, and 3-for-2 in May 1992.
The high and low sales price for the Trust's shares for 1998 and 1997, by
quarter, and the amount of dividends paid by the Trust are as follows:
Quarterly Share Price Range
Dividends
Quarter Per Share High Low
------- --------- ---- ---
1998
4 $.28 $18 3/4 $15 9/16
3 .28 18 15 3/8
2 .28 18 1/4 16 11/16
1 .27 17 5/16 15 7/8
1997
4 $.27 $17 1/4 $15 1/2
3 .27 18 1/2 15 3/4
2 .27 18 5/8 16 1/4
1 .26 19 5/8 16 7/8
The Trust has historically paid dividends on a quarterly basis. Dividends are
normally paid based on the Trust's cash flow from operating activities. The 1999
indicated annual dividend rate is $1.12 based on the annualization of the March
31, 1999 dividend.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Real estate rental revenue $103,597 $79,429 $65,541 $52,597 $45,511
Income before gain on sale of real estate 34,300 30,136 27,964 26,103 23,122
Gain on sale of real estate 6,764 - - - -
Net income 41,064 30,136 27,964 26,103 23,122
Income per share before gain on sale of 0.96 0.90 0.88 0.88 0.82
real estate
Basic and diluted earnings per share 1.15 0.90 0.88 0.88 0.82
Total assets 558,707 468,571 318,488 241,784 178,806
Lines of credit payable 44,000 95,250 5,000 28,000 18,000
Mortgage notes payable 28,912 7,461 7,590 7,706 -
Notes payable 210,000 100,000 100,000 - -
Shareholders' equity 253,733 252,088 195,623 199,735 154,659
Cash dividends paid 39,614 36,108 32,718 29,712 25,981
Cash dividends paid per share 1.11 1.07 1.03 0.99 0.92
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
- ----------------------
REAL ESTATE RENTAL REVENUE: 1998 VERSUS 1997
- --------------------------------------------
Total revenues for 1998 increased $24.2 million, or 30%, to $103.6 million from
$79.4 million in 1997. The percentage increase in real estate rental revenue
from 1997 to 1998 by property type was as follows:
Office Buildings 43%
Retail Centers 13%
Apartment Buildings 17%
Industrial/Flex Properties 37%
During 1998, WRIT's office building revenues and operating income increased by
43% and 48%, respectively, over 1997. These increases were primarily due to 1998
acquisitions (8230 Boone Boulevard and Woodburn Medical Park I and II) and 1997
acquisitions (1600 Wilson Boulevard and 7900 Westpark Drive) combined with
increased rental rates and occupancy for the sector.
During 1998, WRIT's retail center revenues and operating income increased by 13%
and 17%, respectively, over 1997. These increases were primarily due to the 1998
acquisition of 800 South Washington Street retail center combined with increased
rental rates and increased tenant recovery income.
WRIT's apartment building revenues and operating income increased by 17% and
20%, respectively, in 1998 over 1997. These increases were primarily due to the
1997 acquisition of Bethesda Hill Apartments, combined with increased rental
rates across the sector.
WRIT's industrial/flex property revenues and operating income increased by 37%
and 39%, respectively, in 1998 over 1997. These increases were primarily due to
1998 acquisitions (Northern Virginia Industrial Park and 8900 Telegraph Road)
and 1997 acquisitions (Ammendale Technology Parks I and II and Pickett
Industrial Park).
REAL ESTATE RENTAL REVENUE: 1997 VERSUS 1996
Total revenues for 1997 increased $13.9 million, or 21%, to $79.4 million from
$65.5 million in 1996. The percentage increase in real estate rental revenue
from 1997 to 1996 by property type was as follows:
Office Buildings 25%
Retail Centers 2%
Apartment Buildings 23%
Industrial/Flex Properties 43%
During 1997, WRIT's office building revenues and operating income increased by
25% and 30%, respectively, over 1996. These increases were primarily due to 1997
acquisitions (1600 Wilson Boulevard and 7900 Westpark Drive) and 1996
acquisitions (Maryland Trade Centers I & II) combined with increased occupancy
levels and rental rates overall for the sector.
During 1997, WRIT's retail center revenues and operating income increased by 2%
and 4%, respectively, over 1996. These increases were primarily due to increased
occupancy levels and rental rates overall for the sector, partially offset by
increased bad debts.
12
<PAGE>
WRIT's apartment building revenues and operating income increased by 23% and
26%, respectively, in 1997 over 1996. These increases were primarily due to
increased rental rates throughout the sector combined with the 1997 acquisition
of Bethesda Hill Apartments and the 1996 acquisitions of Walker House Apartments
and The Ashby at McLean.
WRIT's industrial/flex property revenues and operating income each increased by
43% in 1997 over 1996. These increases were primarily due to the 1997
acquisitions of Ammendale Technology Parks I & II and the Pickett Industrial
Park and the 1996 acquisition of the Alban Business Center and Earhart Business
Center.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS
Real estate operating expenses as a percentage of revenue were 30% for 1998 as
compared to 32% for 1997 and 33% for 1996. The decrease in 1998 compared to 1997
is attributable to a 42% revenue increase in WRIT's office building segment
resulting from 1997 and 1998 property acquisitions and increased occupancy and
rental rates, combined with only a 32% increase in the office building segment's
operating expenses. The decrease in 1997 compared to 1996 is attributable to a
25% revenue increase in the office building segment of WRIT's portfolio caused
by increases in occupancy levels and rental rates in 1997 combined with only an
18% increase in the office building segment's operating expenses. WRIT's
percentage of revenue from office buildings within its entire real estate
portfolio has increased to 50% at December 31, 1998, from 45% at December 31,
1997 and 44% at December 31, 1996. The increase over 1996 is attributable to
1997 and 1998 office building acquisitions. Generally, real estate operating
expenses have increased to $31.1 million in 1998 from $25.5 million in 1997 and
$21.9 million in 1996 due to the acquisition of six real estate properties in
each of the three years.
Interest expense increased $7.4 million in 1998 from 1997. This is attributable
to the issuance of $110 million in medium-term notes in February 1998 and an
increase in the average balance of outstanding line of credit advances due to
acquisitions in 1998 and 1997. Interest expense of $9.7 million in 1997
increased $4.2 million over 1996 interest expense. This increase is primarily
attributable to the issuance of $100 million in debt securities in August 1996.
The proceeds of the borrowings were primarily used to purchase real estate
assets. Therefore, the $11.6 million increase in interest expense from 1996 to
1998 should be seen in the context of the $28.8 million increase in operating
income from 1996 to 1998.
General and administrative expenses were $6.6 million for 1998 as compared to
$4.2 million for 1997 and $3.1 million for 1996. The increases in general and
administrative expenses in 1998, as compared to 1997 and 1996, are attributable
to increased compensation and personnel additions due to the increased portfolio
of the Trust.
CAPITAL RESOURCES AND LIQUIDITY
WRIT has utilized the proceeds of share offerings, unsecured debt offerings,
medium and long-term fixed interest rate debt, bank lines of credit and cash
flow from operations for its capital needs. Management believes that external
sources of capital will continue to be available to WRIT from its existing
unsecured credit commitments and also believes that additional sources of
capital will be available from selling additional shares and/or the sale of
medium or long-term secured or unsecured notes. The funds raised would be used
to pay off any outstanding advances on WRIT's lines of credit and for new
acquisitions and capital improvements.
As of December 31, 1998, WRIT had line of credit commitments in place from
commercial banks for up to $75 million. WRIT acquired six properties for a total
acquisition cost of $82.2 million in 1998, and acquired six properties for total
acquisition costs of $138.8 million in 1997. The 1998 acquisitions were
primarily financed through line of credit advances, from the February 1998
issuance of $110 million of medium-term notes (after repayment of amounts
outstanding on line-of-credit borrowings of $95 million), the assumption of
mortgages payable amounting to $21.6 million and from the reinvestment of the
proceeds of the sale of three properties in 1998 of $10.8 million. The 1997
acquisitions were financed through line of credit advances and the issuance in
August 1997 of 3,750,000 shares. The line of credit
13
<PAGE>
advances outstanding at December 31, 1997, were subsequently repaid with
proceeds from the February 1998 issuance of $110 million of medium-term notes.
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 of 6.898% 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 $95 million of outstanding advances under its
lines of credit. WRIT used the remainder of the proceeds to finance acquisitions
and capital improvements to its properties. WRIT had four interest rate lock
agreements related to this transaction which settled for $5.4 million and
treated that settlement and the cost of a related interest rate cap agreement as
transaction costs of the borrowing. These costs will be amortized over the life
of the unsecured notes using the effective interest rate method.
In August 1997, WRIT received $61.1 million from the public sale of 3,750,000
shares. WRIT's underwriting expenses were approximately $200,000 resulting in
net proceeds received by the Trust of $60.9 million. Approximately $23.0 million
of the net proceeds was used to repay certain borrowings outstanding under the
Trust's lines of credit resulting from 1997 property acquisitions. The balance
of the net proceeds was used to acquire income producing properties and for
capital improvements.
Cash flow from operating activities totaled $53.6 million, $42.5 million, and
$37.6 million for the years ended December 31, 1998, 1997, and 1996,
respectively, including net income of $41.1 million (net of $6.8 million gain on
property sales), $30.1 million, and $28.0 million, respectively, and
depreciation and amortization of $15.4 million, $10.9 million, and $7.8 million,
respectively. The increase in cash flows from operating activities for all years
is primarily due to the real estate acquisitions and the resultant increase in
net income.
Rental revenue has been the principal source of funds to pay WRIT's operating
expenses, interest expense, and dividends to shareholders. In 1998, 1997 and
1996, WRIT paid dividends totaling $39.6 million, $36.1 million, and $32.7
million, respectively.
CAPITAL IMPROVEMENTS
Capital improvements of $18.7 million were completed in 1998, including tenant
improvements. Capital improvements to WRIT properties in 1997 and 1996 were
approximately $13.9 million and $12.0 million, respectively.
Accretive Capital Improvements
Acquisition Related - These are capital improvements to properties acquired
during the current and preceding two years, which were planned during our
investment underwriting. The cost of these capital improvements was considered
as part of the acquisition cost in WRIT's original projected returns on
investment. In 1998, the most significant of these improvements were made to the
Maryland Trade Center and 7900 Westpark Drive Office Buildings, The Ashby at
McLean and Bethesda Hill Apartments and the Pickett and Northern Virginia
Industrial Parks.
Expansions/Additions and Major Renovations - Expansions/Additions increase the
rentable area of a property. During 1998, WRIT commenced the 49,000 square foot
addition at 7900 Westpark Drive. This 100% pre-leased addition is expected to
be completed in the third quarter of 1999. Major Renovations are improvements
sufficient to increase the income otherwise achievable at a property. During
1998, WRIT commenced the renovation of the Bradlee Shopping Center, which is
also expected to be completed in 1999. See Expansions and Major Renovations on
Page 8 of this report for descriptions of these 1998 projects.
14
<PAGE>
Tenant Improvements - Tenant Improvements are costs associated with commercial
lease transactions such as painting and carpeting. During 1998, WRIT's average
Tenant Improvement Costs per square foot of space leased were as follows:
Office $5.05
Retail $1.30
Industrial $1.61
The Retail and Industrial Tenant Improvement costs are substantially lower than
Office Improvement costs because the improvements required in these property
types are substantially less extensive than in offices. WRIT's office tenant
improvement costs are among the lowest in the industry for a number of reasons.
Over 75% of our office tenants renew their leases with WRIT, and renewing
tenants generally require minimal tenant improvements. However, lower tenant
costs is one of the many benefits of our focus on leasing to smaller office
tenants. Smaller office suites have limited configuration alternatives.
Therefore, WRIT is often able to lease an existing suite with the only tenant
improvements being new paint and carpet.
Other Capital Improvements
Other Capital Improvements are those not included in the above categories. These
are also referred to as recurring capital improvements. Over time these costs
will be reincurred to maintain a property's income and value. In our residential
properties, these include new appliances, flooring, cabinets, bathroom fixtures,
and the like. These improvements are made as needed upon vacancy of an apartment
and averaged $790 for the 770 apartments turned over in 1998. WRIT also expensed
an average of $310 per apartment turnover for items, which do not have a
long-term life and are, therefore, not capitalized.
During 1998, WRIT's capital improvement costs were as follows (in thousands):
Accretive capital improvements:
Acquisition related $ 4,943
Expansions and major renovations 2,856
Tenant improvements 5,653
--------
Subtotal 13,452
Other 5,200
--------
Total $18,652
Management believes that WRIT has the liquidity and the capital resources
necessary to meet all of its known obligations and to make additional property
acquisitions and capital improvements when appropriate to enhance long-term
growth.
15
<PAGE>
YEAR 2000
General
WRIT has assessed and continues to assess the impact of the Year 2000 issue on
its reporting systems and operations. The Year 2000 issue exists because many
computer systems and applications and other systems using computer chips
currently use two-digit fields to designate a year. When the century date
occurs, date sensitive systems may recognize the year 2000 as 1900, or it may
not recognize the year 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. This implementation
was not done in response to Year 2000 issues but in order to improve management
information systems and reporting processes. The new system is Year 2000
compliant. Management has implemented a project to review the remaining
operating systems, including building operations, internal operating systems and
third party compliance to determine if there are any Year 2000 issues related to
such systems.
Project
WRIT's Year 2000 Project (the "Project") is divided into three major sections -
Building Operations, Internal Operating Systems and External Agents (i.e.,
tenants and third party suppliers). The general phases common to each section
are: (1) inventorying Year 2000 items; (2) assigning priorities to identified
items; (3) assessing the Year 2000 compliance of items determined to be material
to WRIT; (4) repairing or replacing material items that are determined not to be
Year 2000 compliant; (5) testing material items; and (6) designing and
implementing contingency and business continuation plans for each property
location and corporate headquarters.
As of December 31, 1998, the inventory and priority assignment phases of each
section of the Project was 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
material financial loss.
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 phase is on schedule and WRIT estimates that approximately 75% of the
activities relating to this phase were completed as of December 31, 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 the second quarter
of 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 System 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 its significant hardware and software is
Year 2000 compliant. Contingency planning for this section is expected to be
completed by the second quarter of 1999. All Internal Operating Systems
activities are expected to be completed by the third quarter of 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 were initiated in the fourth quarter of
1998. These evaluations will be followed by the development of contingency
plans, which are scheduled in the first quarter of 1999, with completion by the
second quarter of 1999.
16
<PAGE>
Costs
WRIT has not had any material expenditures related to the Year 2000 project as
of December 31, 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, 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."
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. Such forward-looking statements include (a)
WRIT's intention to invest in properties that it believes will continue to
increase in income and value; (b) WRIT's belief that the office building sector
will continue to lead WRIT's growth in 1999; (c) WRIT's belief that renovations
and other changes at 7900 Westpark and the Bradlee Shopping Center will increase
traffic and enable it to raise rents; (d) WRIT's belief that external sources of
capital will continue to be available and that additional sources of capital
will be available from the sale of shares or notes; (e) WRIT's belief that it
has the liquidity and capital resources necessary to meet its known obligations
and to make additional property acquisitions and capital improvements when
appropriate to enhance long-term growth; and (f) other statements preceded by,
followed by or that include the words "believes," "expects," "intends,"
"anticipates," "potential" and other similar expressions.
WRIT claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for the
foregoing statements. The following important factors, in addition to those
discussed elsewhere in this Annual Report, could affect WRIT's future results
and could cause those results to differ materially from those expressed in the
forward-looking statements: (a) the economic health of WRIT's tenants; (b) the
economic health of the Greater Washington-Baltimore region, or other markets
they may enter, including the effects of changes in Federal government spending
(c) inflation; (d) consumer confidence; (e) unemployment rates; (f) consumer
tastes and preferences; (g) stock price and interest rate fluctuations; (h)
WRIT's future capital requirements; (i) competition; (j) compliance with
applicable laws, including those concerning the environment and access by
persons with disabilities; and (k) weather conditions.
17
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES AND DEBT SERVICE COVERAGE
The following table sets forth the Trust's ratios of earnings to fixed charges
and debt service coverage for the periods shown:
YEAR ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Earnings to fixed charges 2.00x 4.08x 6.11x
Debt service coverage 3.84x 5.08x 7.26x
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The only material market risk to which WRIT is exposed is interest rate risk.
WRIT's exposure to market risk for changes in interest rates relates primarily
to refinancing long-term fixed rate obligations, the opportunity cost of fixed
rate obligations in a falling interest rate environment and its variable rate
lines of credit. WRIT primarily enters into debt obligations to support general
corporate purposes including acquisition of real estate properties, capital
improvements and working capital needs. In the past WRIT has used interest rate
hedge agreements to hedge against rising interest rates in anticipation of
refinancing or new debt issuance.
The table below presents principal, interest and related weighted average
interest rates by year of maturity.
<TABLE>
<CAPTION>
Cash Flows
------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
In thousands ---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT (all fixed rate
except lines of credit)
Unsecured debt
Principal $ - $ - $ - $ - $50,000 $160,000 $210,000 $203,442
Interest $14,951 $14,951 $14,951 $14,951 $14,951 $118,312 $193,067
Average interest rate 7.12% 7.12% 7.12% 7.12% 7.12% 7.22% 7.20%
Mortgages
Principal amortization
(30 year amor) $ 553 $ 598 $ 649 $ 703 $ 7,161 $ 19,248 $ 28,912 $ 28,912
Interest $ 2,298 $ 2,255 $ 2,209 $ 2,158 $ 1,573 $ 2,407 $ 12,900
Average interest rate 8.05% 8.05% 8.05% 8.05% 7.69% 7.69% 7.13%
Lines of Credit
Principal $44,000 $ 44,000 $ 44,000
Interest $ 1,246 $ 1,246
Average interest rate 5.77% 5.77%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed under Item 14 (a) and
filed as part of this report on the pages indicated are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") no later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
Such incorporation does not include the Performance Graph included in the Proxy
Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is hereby incorporated herein by reference
to WRIT's 1999 Annual Meeting Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated herein by reference
to WRIT's 1999 Annual Meeting Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is hereby incorporated herein by reference
to WRIT's 1999 Annual Meeting Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is hereby incorporated herein by reference
to WRIT's 1999 Annual Meeting Proxy Statement.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14 (a). The following documents are filed as part of this Report:
1. Financial Statements: The following Financial Statements of Washington
Real Estate Investment Trust and Reports of Independent Accountants are
included in this report:
Report of Arthur Andersen LLP.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules: The following financial statement
schedules of Washington Real Estate Investment Trust for the periods
indicated are filed as part of this Report and should be read in
conjunction with the Financial Statements of Washington Real Estate
Investment Trust.
Schedule Page
- -------- ----
III Real Estate and Accumulated Depreciation 41
Supplementary Information: Quarterly Financial Results (unaudited) 44
Schedules not listed above have been omitted because they are not applicable or
are not required or the information to be set forth therein is included in the
Financial Statements or Notes thereto.
3. Exhibits:
3. Declaration of Trust and Bylaws
(a) Declaration of Trust. Incorporated herein by reference to
Exhibit 3 to the Trust's registration statement on Form 8-B
dated July 10, 1996.
(b) Bylaws. Incorporated herein by reference to Exhibit 4 to the
Trust's registration statement on Form 8-B dated July 10, 1996.
(c) Amendment to Declaration of Trust dated September 21, 1998.
Incorporated herein by reference to Exhibit 3 to the Trust's
Form 10-Q dated November 13, 1998.
4.
(a) Credit agreement dated March 1, 1995 between Washington Real
Estate Investment Trust, as borrower, The First National Bank
of Chicago, as lender, and The First National
20
<PAGE>
Bank of Chicago as agent. Incorporated herein by reference to
the Exhibit of the same designation to the Trust's Form 10-K
dated March 28, 1996.
(b) Credit agreement dated July 17, 1998, among Washington Real
Estate Investment Trust, as borrower, Crestar Bank, as lender,
First Union National Bank (successor by merger to Signet Bank),
as lender, and Crestar Bank, as agent. Incorporated herein by
reference to the Trust's Form 10-K dated March 31, 1998.
(c) Indenture dated as of August 1, 1996 between Washington Real
Estate Investment Trust and The First National Bank of
Chicago.*
(d) Officers' Certificate Establishing Terms of the Notes, dated
August 8, 1996.*
(e) Form of 2003 Notes.*
(f) Form of 2006 Notes.*
(g) Form of MOPPRS Notes.****
(h) Form of 30 year Notes.****
(i) Remarketing Agreement.****
(j) The Trust is a party to a number of other instruments defining
the rights of holders of long-term debt. No such instrument
authorizes an amount of securities in excess of 10 percent of
the total assets of the Trust and its Subsidiaries on a
consolidated basis. On request, the Trust agrees to furnish a
copy of each such instrument to the Commission.
10. Management contracts, plans and arrangements
(a) Employment Agreement dated May 11, 1994 with Edmund B. Cronin,
Jr.**
(b) 1991 Incentive Stock Option Plan, as amended.**
(c) Nonqualified Stock Option Agreement dated June 27, 1990 with
B. Franklin Kahn.**
(d) Nonqualified Stock Option Agreement dated December 14, 1994
with Edmund B. Cronin, Jr.**
(e) Nonqualified Stock Option Agreement dated December 19, 1995
with Edmund B. Cronin, Jr. Incorporated herein by reference to
Exhibit 10(e) to the 1995 Form 10-K.
(f) Share Grant Plan.***
(g) Share Option Plan for Trustees.***
21. Subsidiaries of Registrant
In 1995, WRIT formed a subsidiary partnership, WRIT Limited
Partnership, a Maryland limited partnership, in which WRIT
owns 100% of the partnership interest.
In 1998, WRIT formed a subsidiary limited liability company,
WRIT-NVIP, L.L.C., a Virginia limited liability company, in
which WRIT owns 93% of the company interests.
21
<PAGE>
In 1998, WRIT formed a subsidiary company, Real Estate
Management, Inc., a Maryland Corporation, in which WRIT owns
100% of the company interests.
22. Consents
(a) Consent of Arthur Andersen LLP
27. Financial Data Schedules
(a) 1998 financial data schedule
ITEM 14 (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.
(2) December 15, 1998 - Report pursuant to Item 2 on the acquisition of
Woodson Medical Park I and II and financial statements of the acquired
properties pursuant to Item 7.
* Incorporated herein by reference to the Exhibit of the same designation
to the Trust's Form 8-K filed August 13, 1996.
** Incorporated herein by reference to the Exhibit of the same designation
to Amendment No. 2 to the Trust's Registration Statement on Form S-3
filed July 17, 1995.
*** Incorporated herein by reference to the exhibits 4(a) and 4(b),
respectively to the Trust's Registration Statement on Form S-8 filed on
March 17, 1998.
**** Incorporated herein by reference to the exhibit of the same designation
to the Trust's Registration Statement on Form S-3 filed on March 17,
1998.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Security
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WASHINGTON REAL ESTATE INVESTMENT TRUST
Date: March 8, 1999 By: /s/ Edmund B. Cronin, Jr.
---------------------------
Edmund B. Cronin, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Arthur A. Birney Chairman and Trustee March 10, 1999
----------------------
Arthur A. Birney
/s/ William N. Cafritz Trustee March 10, 1999
----------------------
William N. Cafritz
/s/ John M. Derrick, Jr. Trustee March 10, 1999
-----------------------
John M. Derrick, Jr.
/s/ John P. McDaniel Trustee March 10, 1999
----------------------
John P. McDaniel
/s/ David M. Osnos Trustee March 10, 1999
----------------------
David M. Osnos
/s/ Stanley P. Snyder Trustee March 10, 1999
----------------------
Stanley P. Snyder
/s/ Larry E. Finger Senior Vice President and March 10, 1999
---------------------- Chief Financial Officer
Larry E. Finger
/s/ Laura Franklin Vice President and March 10, 1999
---------------------- Chief Accounting Officer
Laura Franklin
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Washington Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of Washington Real
Estate Investment Trust (the "Trust," a Maryland real estate investment trust)
and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Trust and Subsidiaries as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule included
on pages 41 through 44 of the Form 10-K is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 9, 1999
24
<PAGE>
<TABLE>
Washington Real Estate Investment Trust and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1998 and 1997
(In thousands)
1998 1997
---- ----
ASSETS
<S> <C> <C>
Real estate, at cost $598,874 $504,315
Accumulated depreciation (68,301) (56,015)
------- -------
Total investment in real estate, net 530,573 448,300
Cash and temporary investments 4,595 7,908
Rents and other receivables, net of allowance for doubtful accounts of $821 and
$884, respectively 4,130 4,035
Prepaid expenses and other assets 19,409 8,328
------ -----
Total assets $558,707 $468,571
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 13,524 $ 8,068
Advance rents 2,680 2,615
Tenant security deposits 4,331 3,089
Mortgage notes payable 28,912 7,461
Lines of credit payable 44,000 95,250
Notes payable 210,000 100,000
------- -------
Total liabilities 303,447 216,483
------- -------
MINORITY INTEREST
1,527 -
----- -----
SHAREHOLDERS' EQUITY
Shares of beneficial interest, $.01 par value; 100,000 shares authorized: 35,692
and 35,678 shares issued and outstanding, respectively
357 357
Additional paid in capital 253,376 251,731
------- -------
Total shareholders' equity 253,733 252,088
------- -------
Total liabilities and shareholders' equity $558,707 $468,571
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
<TABLE>
Washington Real Estate Investment Trust and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Real estate rental revenue $103,597 $79,429 $65,541
Real estate expenses:
Utilities 7,012 5,897 5,194
Real estate taxes 7,372 5,746 4,782
Repairs and maintenance 4,296 3,576 3,190
Other expenses 12,434 10,240 8,766
------ ------ -----
Total real estate expenses 31,114 25,459 21,932
------ ------ ------
Operating income 72,483 53,970 43,609
Depreciation and amortization 15,399 10,911 7,784
------ ------ -----
Income from real estate 57,084 43,059 35,825
Other income 880 1,011 708
Interest expense (17,106) (9,691) (5,474)
General and administrative expenses (6,558) (4,243) (3,095)
------ ------ -----
Income before gain on sale of real estate 34,300 30,136 27,964
Gain on sale of real estate 6,764 - -
----- ----- -----
Net income $41,064 $30,136 $27,964
======= ======= =======
Basic and diluted earnings per share $ 1.15 $ 0.90 $ 0.88
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
<TABLE>
Washington Real Estate Investment Trust and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
Shares of
Beneficial Additional
Interest at Paid in Shareholders'
Shares Par Value Capital Equity
------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 31,752 $ - $199,735 $199,735
Net income - - 27,964 27,964
Dividends - - (32,718) (32,718)
State of Maryland reorganization - 318 (318) -
Share options exercised 51 - 642 642
-- --- --- ---
Balance, December 31, 1996 31,803 318 195,305 195,623
Net income - - 30,136 30,136
Net proceeds from sale of shares 3,750 38 60,825 60,863
Dividends - - (36,108) (36,108)
Share options exercised 125 1 1,573 1,574
--- - ----- -----
Balance, December 31, 1997 35,678 357 251,731 252,088
Net income - - 41,064 41,064
Dividends - - (39,614) (39,614)
Share options exercised 14 - 195 195
-- --- --- ---
Balance, December 31, 1998 35,692 $357 $253,376 $253,733
====== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
<TABLE>
Washington Real Estate Investment Trust and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $41,064 $ 30,136 $27,964
Adjustments to reconcile net income to cash provided by operating
activities:
Gain on sale of real estate (6,764) - -
Depreciation and amortization 15,399 10,911 7,784
Increases in other assets (2,895) (2,047) (2,120)
Increases in other liabilities 6,789 3,499 3,932
----- ----- -----
Cash provided by operating activities 53,593 42,499 37,560
------- ------ -------
Cash flows from investing activities
Real estate acquisitions, net* (59,087) (138,804) (69,888)
Improvements to real estate (18,652) (13,913) (11,972)
Non-real estate capital improvements (1,967) - -
Net proceeds from sale of real estate 10,844 - -
------ -------- --------
Cash used in investing activities (68,862) (152,717) (81,860)
------- -------- -------
Cash flows from financing activities
Dividends paid (39,614) (36,108) (32,718)
Line of credit advances 44,000 113,250 44,000
Repayments of lines of credit (95,250) (23,000) (67,000)
Mortgage principal payments (172) (129) (117)
Net proceeds from sale of shares - 60,863 -
Net proceeds from debt offering 102,797 - 97,637
Net proceeds from the exercise of share options 195 1,574 642
--- ----- ---
Cash provided by financing activities 11,956 116,450 42,444
------ ------- ------
Net (decrease) increase in cash and temporary investment (3,313) 6,232 (1,856)
Cash and temporary investments, beginning of year 7,908 1,676 3,532
----- ----- -----
Cash and temporary investments, end of year $ 4,595 $ 7,908 $ 1,676
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $13,475 $ 9,433 $ 2,747
======= ======== ========
Supplemental schedule of non-cash investing and financing activities
- --------------------------------------------------------------------
On November 30, 1998, WRIT purchased Woodburn Medical Park I and II for an
acquisition cost of $35.2 million. WRIT assumed two mortgages in the amount of
$9.2 million and $12.4 million and paid the balance in cash. The $21.6 million
in assumed mortgages is not included in the $59.1 million amount shown as real
estate acquisitions.
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
Washington Real Estate Investment Trust and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998, 1997 and 1996
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 and
operation of income-producing real properties.
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
percent 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.
2. Accounting Policies:
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Trust and its majority owned subsidiaries, after eliminating all intercompany
transactions.
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.
Revenues from percentage of sales provisions in WRIT's leases are accounted for
in accordance with EIFF 98-9, "Accounting for Contingent Rent."
Deferred Financing Costs
Costs associated with the issuance of senior subordinated notes and draws on
lines of credit are capitalized and amortized using the effective interest rate
method over the term of the related notes.
29
<PAGE>
Real Estate and Depreciation
Real estate assets are recorded at cost. 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 expensed as incurred.
WRIT evaluates quarterly the carrying value of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." In cases where management is holding for sale particular
properties, the Trust assesses impairment based on whether the fair value
(estimated sales price less costs of disposal) of each individual property to be
sold is less than the net book value. A property is considered to be held for
sale when the Trust has made the decision to dispose of the property. Otherwise,
the Trust assesses impairment of its real estate properties based on whether it
is probable that undiscounted future cash flows from each individual property
will be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value. There were no property impairments recognized
during the three-year period ending December 31, 1998.
Cash and Temporary Investments
Cash and temporary investments include investments readily convertible to known
amounts of cash with original maturities of 90 days or less.
Interest Rate Protection Agreements
WRIT has entered into a series of interest rate protection agreements to reduce
its exposure to interest rate risk on anticipated borrowings. The costs (if any)
of such agreements which qualify for hedge accounting are included in other
assets and are amortized over the interest rate protection agreement term. To
qualify for hedge accounting, the interest rate protection agreement must meet
two criteria: (i) the debt to be hedged exposes WRIT to interest rate risk and
(ii) the interest rate protection agreement reduces WRIT's exposure to interest
rate risk. In the event that interest rate protection agreements that qualify
for hedge accounting are terminated or are closed out, the associated gain or
loss is deferred and amortized over the term of the underlying hedged asset or
liability. Amounts to be paid or received under interest rate protection
agreements are accrued currently and are netted with interest expense for
financial statement presentation purposes. Additionally, in the event that
interest rate protection agreements do not qualify as hedges, such agreements
are reclassified to investments accounted for at fair value, with any gain or
loss included as a component of income.
30
<PAGE>
Comprehensive Income
WRIT has no items of comprehensive income that would require separate reporting
in the accompanying consolidated statements of income.
Earnings Per Common Share
During 1997, WRIT adopted SFAS No. 128, "Earnings per Share." This statement
requires the computation and reporting of both "basic" and "diluted" earnings
per share.
"Basic earnings per share" is computed as net income divided by the
weighted-average common shares outstanding. "Diluted earnings per share" is
computed as net income divided by the total weighted average common shares
outstanding plus the effect of dilutive common equivalent shares outstanding for
the period. Dilutive common equivalent shares reflect the assumed issuance of
additional common shares pursuant to certain of the Trust's share based
compensation plans (see Note 8) that could potentially reduce or "dilute"
earnings per share, based on the treasury stock method.
The weighted-average number of shares outstanding for the year ended December
31, 1998, 1997, and 1996, was 35.7, 33.4, and 31.8 million shares, respectively.
There was no impact of dilution of common equivalent shares on the basic
weighted-average shares outstanding for the years ended December 31, 1998, 1997
and 1996.
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.
New Statements of Financial Accounting Standards
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure to a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. Although
currently WRIT has no derivative instruments this statement would apply to, it
could affect derivative instruments acquired by WRIT in future periods.
31
<PAGE>
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. Real Estate Investments:
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C., and Virginia and in 1997, Delaware as follows:
December 31,
-------------
1998 1997
---- ----
(In thousands)
Office buildings $323,152 $268,977
Retail centers 95,017 87,618
Apartment buildings 83,163 80,173
Industrial distribution/flex properties 97,542 67,547
------ ------
$598,874 $504,315
======== ========
WRIT's results of operations are dependent on the overall economic health of its
tenants and the specific segments in which WRIT holds properties, as well as the
overall economic health of the markets in which it owns property. These segments
include commercial, residential, retail, and industrial/flex properties.
Although all sectors are affected by external factors, such as inflation,
consumer confidence, unemployment rates, and consumer tastes and preferences,
the retail segment is particularly sensitive to such factors. A decline in the
retail sector of the economy could reduce merchant sales, which could adversely
affect the operating results of WRIT.
As of December 31, 1998, 7900 Westpark office building accounted for 13 percent
of total assets and 10 percent of total revenues. No other single property
accounted for more than 10 percent of total assets or total revenues.
Properties acquired by WRIT during the year ending December 31, 1998 are as
follows:
<TABLE>
Acquisition
Acquisition Rentable Cost
Date Property Type Square Feet (In thousands)
---- -------- ---- ----------- --------------
<S> <C> <C> <C> <C>
May 22, 1998 Northern Virginia Industrial Park Industrial 790,000 $30,350
June 23, 1998 800 South Washington St. 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
November 30, 1998 Woodburn Medical Park I and II Office 167,000 35,200
--- ---- ------- ------
1,092,000 $81,560
========= =======
</TABLE>
32
<PAGE>
WRIT accounted for each acquisition using the purchase method of accounting.
<TABLE>
Properties sold by WRIT during the year ending December 31, 1998, are as
follows:
Disposition Rentable Sales Price
Date Property Type Square Feet (In Thousands)
---- -------- ---- ----------- --------------
<S> <C> <C> <C> <C> <C>
March 23, 1998 Shirley I-395 Business Center Industrial 113,000 $ 7,815
May 7, 1998 Ravensworth Center Industrial 29,000 1,650
December 17, 1998 Dover Mart Retail 44,000 1,975
------ -----
186,000 $11,440
======= =======
</TABLE>
4. Mortgage Notes Payable:
On August 22, 1995, WRIT assumed a $7.8 million mortgage note payable as partial
consideration for its acquisition of Frederick County Square retail center. The
mortgage bears interest at 9 percent. Principal and interest are payable monthly
until January 1, 2003, at which time all unpaid principal and interest are
payable in full. On November 30, 1998, WRIT assumed a $9.2 million mortgage note
payable and a $12.4 million mortgage note payable as partial consideration for
its acquisition of Woodburn Medical Park I and II. Both mortgages bear interest
at 7.69 percent per annum. Principal and interest are payable monthly until
September 15, 2005, at which time all unpaid principal and interest are payable
in full. Annual maturities of principal as of December 31, 1998, are as follows:
(In thousands)
1999 $ 553
2000 598
2001 649
2002 703
2003 7,161
Thereafter 19,248
------
$28,912
=======
5. Unsecured Lines of Credit Payable:
During 1998, WRIT maintained two unsecured lines of credit: a $25 million line
of credit ("Credit Facility No. 1") and a $50 million line of credit ("Credit
Facility No. 2").
Credit Facility No. 1
WRIT had $0 and $25 million outstanding as of December 31, 1998 and 1997,
respectively, related to Credit Facility No. 1.
33
<PAGE>
<TABLE>
The following advances have been made under this commitment:
Advance Date Paid Amount 1998 1997 1996
Date in Full (In thousands) Rate Rate Rate
---- ------- -------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
May 15, 1995 August 19, 1996 $ 7,000 - - 5.99%
November 2, 1995 September 28, 1996 18,000 - - 6.11%-5.74%
September 26, 1996 September 26, 1997 4,000 - 6.83% 6.83%
November 14, 1997 February 25, 1998 25,000 6.64%-8.50% 6.40%-6.64% -
</TABLE>
All new advances and interest rate adjustments upon the expiration of WRIT's
interest lock-in dates will bear interest at LIBOR plus a spread based on WRIT's
public debt rating. 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. On January 31, 1999, WRIT executed an extension of this
agreement to change the termination date to March 17, 1999, at which time WRIT
intends to either further extend the agreement or pursue other refinancing
arrangements.
This $25 million credit commitment requires WRIT to pay the lender an unused
commitment fee at the rate of 0.15 percent per annum in the first year, 0.20
percent per annum through August 1996, and 0.175 percent thereafter, on the
amount that the $25 million commitment exceeds the balance of outstanding
advances and term loans. At December 31, 1998 and 1997, $25.0 million and $0,
respectively, of this commitment was unused and available for subsequent
acquisitions or capital improvements. This fee is paid quarterly. This
commitment also contains certain financial and non-financial covenants including
debt service coverage, net worth, and permitted indebtedness ratios which WRIT
has met as of December 31, 1998. In addition, this commitment requires approval
to be obtained from the lender for purchases by the Trust over an agreed upon
amount.
Credit Facility No. 2
WRIT had $44 million and $50 million outstanding as of December 31, 1998 and
1997, respectively, related to Credit Facility No. 2.
<TABLE>
The following advances have been made under this commitment:
Advance Date Paid Amount 1998 1997 1996
Date in Full (In Thousands) Rate Rate Rate
---- ------- -------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 21, 1995 August 13, 1996 $ 3,000 - - 6.06%-6.15%
March 13, 1996 August 13, 1996 11,000 - - 5.78%-6.25%
May 17, 1996 August 13, 1996 28,000 - - 6.06%
November 26, 1996 August 1, 1997 1,000 - 6.29% 6.05%
February 28, 1997 August 1, 1997 14,000 - 6.25% -
March 27, 1997 August 1, 1997 3,000 - 6.25% -
June 27, 1997 August 1, 1997 1,000 - 6.19% -
November 12, 1997 February 25, 1998 17,000 6.64% 6.36%-6.64% -
November 14, 1997 February 25, 1998 33,000 6.61% 6.40%-6.61% -
May 22, 1998 - 13,000 5.54%-6.39% - -
June 23, 1998 - 4,000 6.02%-6.39% - -
September 9, 1998 - 2,000 6.23% - -
September 25, 1998 - 3,000 5.76% - -
September 28, 1998 - 8,000 5.83% - -
November 30, 1998 - 14,000 5.82% - -
</TABLE>
34
<PAGE>
All unpaid interest and principal are due July 1999 and can be prepaid prior to
this date without any prepayment fee or yield maintenance obligation. WRIT has
the option to extend this agreement until July 2000. Any new advances shall bear
interest at LIBOR plus a spread based on WRIT's public debt rating.
Credit Facility No. 2 provides WRIT the option to convert any advances or
portions thereof into a term loan at any time after January 1999, and prior to
July 1999, or July 2000, if extended. The principal amount of each term loan, if
any, shall be repaid in July 2011. Such term loan(s) may be prepaid subject to a
prepayment fee.
This $50 million credit commitment requires WRIT to pay the lender an unused
commitment fee at the rate of 0.175 percent per annum on the amount that the $50
million commitment exceeds the balance of outstanding advances and term loans.
At December 31, 1998 and 1997, $6 million and $0, respectively, of this
commitment was unused. This fee is paid quarterly in arrears. This commitment
also contains certain financial covenants including cash flow to debt service,
net worth, capitalization and permitted indebtedness ratios which WRIT has met
as of December 31, 1998.
Bridge Loan
During 1997, WRIT temporarily expanded one of its lines of credit to provide up
to an additional $20.25 million through February 27, 1998, which was repaid on
February 27, 1998. The bridge loan accrued interest at LIBOR plus 0.70 percent.
At February 27, 1998 and December 31, 1997, the interest rate was 8.50 percent
and 6.64 percent, respectively. WRIT was required to pay a commitment fee equal
to 0.10 percent of the commitment. The bridge loan also required WRIT to pay the
lender an unused commitment fee at the rate of 0.175 percent on the amount that
the $20.25 million commitment exceeded the balance of outstanding advances. The
bridge loan was repaid on February 27, 1998.
Information related to short-term borrowings are as follows (in thousands):
1998 1997
---- ----
Maximum Amount Outstanding $95,250 $95,250
Average Amount Outstanding 29,547 23,000
Weighted Average Interest Rate 6.38% 6.51%
6. Senior and Medium Term Notes Payable:
Senior Notes
On August 8, 1996, WRIT entered into an underwriting agreement to sell $50
million of 7.125 percent 7-year unsecured notes due August 13, 2003, and $50
million of 7.25 percent unsecured 10-year notes due August 13, 2006. This
transaction closed on August 13, 1996. The 7-year notes were sold at 99.107
percent of par and the 10-year notes were sold at 98.166 percent of par. Net
proceeds to the Trust after deducting underwriting expenses were $97.6 million.
The 7-year notes bear an effective interest rate of 7.46 percent, and the
10-year notes bear an
35
<PAGE>
effective interest rate of 7.49 percent, for a combined
effective interest rate of 7.47 percent. In 1996, 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 covenants including debt service coverage and permitted indebtedness
ratios which WRIT has met as of December 31, 1998.
Medium Term Notes
On February 20, 1998, WRIT sold $50 million of 7.25 percent unsecured notes due
February 25, 2028 at 98.653 percent to yield approximately 7.36 percent. WRIT
also sold $60 million in unsecured Mandatory Par Put Remarketed Securities
("MOPPRS") at an effective borrowing rate through the remarketing date (February
2008) of approximately 6.74 percent. 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 settled interest rate lock agreements for $5.4 million and
treated the cost of the interest rate caps as a transaction cost of the
borrowing. These costs are amortized over the life of the unsecured notes using
the effective interest rate method. These notes also contain certain financial
covenants including debt service coverage and permitted indebtedness ratios,
which WRIT has met as of December 31, 1998.
7. Shares of Beneficial Interest and Dividends:
In August 1997, WRIT received $61.1 million from the public sale of 3,750,000
shares. WRIT's offering costs were approximately $200,000, resulting in net
proceeds received by the Trust of $60.9 million. Approximately $23.0 million of
the net proceeds was used to repay certain borrowings outstanding under the
Trust's lines of credit resulting from 1997 property acquisitions. The balance
of the net proceeds was used to acquire income producing properties and for
capital improvements.
The following is a breakdown of the taxable percentage of WRIT's dividends for
1998, 1997, and 1996, respectively:
Ordinary Income Return of Capital
--------------- -----------------
1998 98% 2%
1997 93% 7%
1996 91% 9%
36
<PAGE>
<TABLE>
8. Share Options and Grants:
WRIT maintains an Incentive Stock Option Plan (the "Plan"), which includes
qualified and non-qualified options. As of December 31, 1998, 1.5 million shares
may be awarded to eligible employees. Under the Plan, options, which are issued
at market price on the date of grant, vest after not more than two years and
expire ten years following the date of grant. Options may be granted under the
Plan at any time prior to June 25, 2001. Activity under the Plan is summarized
below:
1998 1997 1996
---- ---- ----
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 409,000 $15.93 365,000 $14.78 320,000 $14.00
Granted 430,000 17.59 183,000 16.13 96,000 16.15
Exercised (8,000) 12.41 (125,000) 12.58 (51,000) 12.54
Expired (25,000) 16.76 (14,000) 18.33 - -
Outstanding at December 31 806,000 16.83 409,000 15.93 365,000 14.78
Exercisable at December 31 288,000 15.90 173,000 15.84 216,000 14.45
</TABLE>
The 288,000 exercisable options outstanding at December 31, 1998, have exercise
prices between $12.410 and $20.625, with a weighted-average exercise price of
$15.90 and a weighted average remaining contractual life of 7.24 years. The
remaining 518,000 options have exercise prices between $16.13 and $17.59, with a
weighted average exercise price of $17.34 and a remaining contractual life of
9.83 years.
WRIT accounts for the Plan and the non-qualified share options granted under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," WRIT's net income and earnings per
share would have been reduced to the following pro forma amounts:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income: As Reported $41,064 $30,136 $27,964
Pro Forma 40,240 29,780 27,815
Basic Earnings Per Share: As Reported 1.15 0.90 0.88
Pro Forma 1.13 0.89 0.88
Weighted-average fair value of options
granted 1.92 1.94 1.63
Weighted-average assumptions:
Expected lives (years) 7 7 7
Risk free interest rate 5.09% 5.75% 6.34%
Expected volatility 19.21% 17.41% 15.39%
Expected dividend yield 6.27% 5.79% 6.42%
</TABLE>
Because the method of accounting has not been applied to options granted prior
to January 1, 1995, the resulting pro forma compensation may not be
representative of that to be expected in future years. The assumptions used in
the calculations of weighted average fair value of
37
<PAGE>
options granted are as prescribed under generally accepted accounting
principles. Such assumptions may not be the same as those used by the financial
community and others in determining the fair value of such options.
WRIT has computed basic earnings per share. There was no impact of dilution of
common equivalent shares on the basic weighted-average shares outstanding for
the years ended December 31, 1998, 1997, and 1996.
During 1998 and 1997, WRIT issued 9,692 and 5,877 share grants, respectively, to
executives and trustees of the Trust. The respective compensation expense was
recorded based upon the share price at the grant date. Share grants are awarded
by the compensation committee of the Board of Directors.
9. Benefit Plans:
During 1996, management adopted an Incentive Compensation Plan ("the
Compensation Plan") for its senior personnel which is intended to align their
compensation growth with shareholders' interests. Essentially, the Compensation
Plan limits future salary increases and provides cash bonus incentives, share
options under the Incentive Share Option Plan and share grants under the Share
Grant Plan based on performance. The financial incentives to management are
earned after WRIT has achieved a prescribed growth. This plan is effective from
1996 forward and will be reviewed by the Board of Trustees' Compensation
Committee each year.
In 1997, WRIT implemented a Retirement Savings Plan (the "Savings Plan"). It was
established so that participants in the Savings Plan may elect to contribute a
portion of their earnings to the Savings Plan and WRIT may, at its discretion,
make a voluntary contribution to the Savings Plan.
WRIT maintained a noncontributory defined benefit pension plan for all eligible
employees through December 31, 1995. At December 31, 1995, all benefit accruals
under the plan were frozen and thus the projected benefit obligation ("PBO") and
the accumulated benefit obligation ("ABO") became equal. WRIT anticipates
terminating the plan no later than December 31, 1999. Since there are no further
benefit accruals provided under the plan, WRIT has substantially reduced its
funding obligation and there will be no further increases in the ABO or PBO.
Benefits under the plan were generally based on years of service and final
average pay. Pension costs are accrued and funded annually from plan entry date
in the plan to projected retirement date and include service costs for benefits
earned during the period and interest costs on the projected benefit obligation
less the return on plan assets. The effects of the pension plan is immaterial to
WRIT's financial statements.
38
<PAGE>
10. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 requires disclosure about
the fair value of financial instruments. Based on the current interest rate
environment and management estimates, the carrying values of the mortgage notes
payable and lines of credit payable approximates their fair values. The fair
value of the 7.125 percent and 7.25 percent senior notes is $50.5 million and
$50.4 million, respectively. The fair value of the $50 million and $60 million
medium term notes is $45.0 million and $57.0 million, respectively.
11. Rentals Under Operating Leases:
Noncancellable commercial operating leases provide for minimum rental income
during each of the next five years of approximately $74.4, $59.2, $47.3, $30.2,
$21.0 and $42.6 million thereafter. Apartment leases are not included as they
are generally for one year. Most of these commercial leases increase in future
years based on changes in the Consumer Price Index or agreed-upon percentages.
Contingent rentals from the shopping centers, based on a percentage of tenants'
gross sales, were $462,000, $351,000, and $483,000 in 1998, 1997 and 1996,
respectively.
12. Contingencies:
In the normal course of business, WRIT is involved in various types of pending
or unasserted claims. In the opinion of management, these claims will not have a
material impact on the financial condition or future operations of the Trust.
13. Segment Information:
WRIT has four reportable segments: Office Buildings, Industrial/Flex Properties,
Apartment Buildings, and Retail Centers. Office Buildings represent 50 percent
of real estate rental revenue and provide office space for various types of
businesses. Industrial/Flex Properties represent the remaining 13 percent of
real estate rental revenue and are used for warehousing and distribution.
Apartment Buildings represent 20 percent of real estate rental revenue and
provide housing for families throughout the Washington Metropolitan area. Retail
Centers represent 17 percent 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 the
summary of significant accounting policies. WRIT evaluates performance based
upon operating income from the combined properties in each segment.
WRIT's reportable segments are a consolidation of related properties which offer
different products. They are managed separately because each segment requires
different operating, pricing and leasing strategies. All of the properties have
been acquired separately and are incorporated into the applicable segment.
39
<PAGE>
<TABLE>
1998
(In Thousands)
Industrial/
Office Flex Apartment Retail Corporate
Buildings Properties Buildings Centers and Other Consolidated
--------- ---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Real estate rental revenue $51,311 $13,547 $21,170 $17,569 $ - $103,597
Real estate expenses 16,610 2,703 8,096 3,705 - 31,114
------ ----- ----- ----- ----- ------
Operating income 34,701 10,844 13,074 13,864 - 72,483
Depreciation and
amortization 8,447 2,330 2,581 2,041 - 15,399
----- ----- ----- ----- ----- ------
Income from real estate 26,254 8,514 10,493 11,823 - 57,084
Other income - - - - 880 880
Interest expense (69) - - (665) (16,372) (17,106)
General and administrative - - - - (6,558) (6,558)
------ ----- ------ ------ ------- ------
Income before gain on sale of
real estate 26,185 8,514 10,493 11,158 (22,050) 34,300
------ ----- ------ ------ ------- ------
Gain on sale of real estate - - - - 6,764 6,764
------ ----- ------ ------ ------- ------
Net income $26,185 $8,514 $10,493 $11,158 $(15,286) $41,064
======= ====== ======= ======= ======== =======
Capital investments $ 54,389 $34,706 $3,012 $8,755 $1,967 $102,829
======== ======= ====== ====== ====== ========
Total assets $300,043 $90,077 $65,679 $84,198 $18,710 $558,707
======== ======= ======= ======= ======= ========
1997
(In Thousands)
Industrial/
Office Flex Apartment Retail Corporate
Buildings Properties Buildings Centers and Other Consolidated
--------- ---------- --------- ------- --------- ------------
Real estate rental revenue $35,972 $9,877 $18,040 $15,540 $ - $79,429
Real estate expenses 12,579 2,051 7,145 3,684 - 25,459
------ ----- ----- ----- ------ ------
Operating income 23,393 7,826 10,895 11,856 - 53,970
Depreciation and
amortization 5,404 1,585 2,091 1,831 - 10,911
----- ----- ----- ----- ------ ------
Income from real estate 17,989 6,241 8,804 10,025 - 43,059
Other income - - - - 1,011 1,011
Interest expense - - - (677) (9,014) (9,691)
General and administrative - - - - (4,243) (4,243)
------ ------ ------ ------ ------ ------
Net income $17,989 $6,241 $8,804 $9,348 $(12,246) $30,136
======= ====== ====== ====== ======== =======
Capital investments $106,264 $22,919 $19,885 $3,649 $ - $152,717
======== ======= ======= ====== ======== ========
Total assets $253,233 $60,290 $65,087 $77,233 $ 12,728 $468,571
======== ======= ======= ======= ======== ========
</TABLE>
14. Subsequent Events:
Subsequent to December 31, 1998, WRIT closed transactions to sell and purchase
real estate assets. On January 28, 1999, WRIT acquired Dulles South IV for $6.84
million. The property consists of two flex/warehouse buildings containing 83,000
rentable square feet. The property is 100 percent leased.
40
<PAGE>
On February 8, 1999, WRIT closed on the sale of two office buildings, 444 N.
Frederick Road and Arlington Financial Center and one industrial distribution
facility, Department of Commerce. On February 26, 1999, WRIT sold the V Street
Distribution Center. WRIT sold these properties for $23.1 million resulting in a
gain of $7.9 million. WRIT intends to use the proceeds to purchase other real
estate assets.
41
<PAGE>
<TABLE>
Schedule III
Washington Real Estate Investment Trust and Subsidiaries
Summary of Real Estate Investments and Accumulated Depreciation
Net
Initial Cost (b) Improvements
---------------- ------------
Building (Retirements)
and since
Properties Location Land Improvements Acquisition
- --------------------------- --------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Office Buildings
10400 Connecticut Avenue Maryland $ 222,000 $1,691,000 $3,473,000
1901 Pennsylvania Avenue Washington, D.C. 892,000 3,481,000 5,839,000
51 Monroe Street Maryland 840,000 10,869,000 9,115,000
444 North Frederick Avenue (g) Maryland 813,000 3,818,000 1,823,000
7700 Leesburg Pike Virginia 3,669,000 4,000,000 5,845,000
Arlington Financial Center (g) Virginia 3,000,000 3,293,000 1,188,000
515 King Street Virginia 4,102,000 3,931,000 1,116,000
The Lexington Building Maryland 1,180,000 1,263,000 610,000
The Saratoga Building Maryland 1,464,000 1,554,000 812,000
Brandywine Center Maryland 718,000 735,000 435,000
Tycon Plaza II Virginia 3,262,000 7,243,000 1,973,000
Tycon Plaza III Virginia 3,255,000 7,794,000 1,611,000
6110 Executive Boulevard Maryland 4,621,000 11,895,000 2,570,000
1220 19th Street Washington, D.C. 7,802,000 11,366,000 539,000
Maryland Trade Center I Maryland 3,330,000 12,747,000 2,234,000
Maryland Trade Center II Maryland 2,826,000 9,487,000 620,000
1600 Wilson Boulevard Virginia 6,661,000 16,740,000 591,000
7900 Westpark Drive Virginia 12,049,000 64,212,000 2,419,000
8230 Boone Boulevard Virginia 1,417,000 6,760,000 -
Woodburn Medical Park I Virginia 2,563,000 12,530,000 -
Woodburn Medical Park II Virginia 2,632,000 17,612,000 -
--------- ---------- ----------
67,318,000 213,021,000 42,813,000
---------- ----------- ----------
Retail Centers
Concord Centre Virginia 413,000 850,000 2,872,000
Bradlee Virginia 4,152,000 5,428,000 5,341,000
Clairmont Maryland 155,000 892,000 1,004,000
Chevy Chase Metro Plaza Washington, D.C. 1,549,000 4,304,000 3,011,000
Prince William Plaza Virginia 171,000 820,000 988,000
Takoma Park Maryland 415,000 1,085,000 16,000
Westminster Maryland 553,000 1,889,000 1,801,000
Wheaton Park Maryland 623,000 857,000 3,402,000
Montgomery Village Center Maryland 11,624,000 9,105,000 900,000
Shoppes of Foxchase Virginia 5,838,000 2,980,000 1,114,000
Frederick County Square (e) Maryland 6,561,000 6,830,000 1,304,000
South Washington St. Virginia 2,624,000 3,546,000 -
--------- --------- ---------
34,678,000 38,586,000 21,753,000
---------- ---------- ----------
Gross Amounts at which carried at
December 31, 1998 Accumulated
--------------------------------- Depreciation
Buildings at
and December 31, Date of
Properties Location Land Improvements Total (d) 1998 Construction
- ----------------------------- --------------- ------------- ------------ --------- ---- ------------
Office Buildings
10400 Connecticut Avenue Maryland $ 222,000 $5,164,000 $5,386,000 $1,752,000 1965
1901 Pennsylvania Avenue Washington, D.C. 892,000 9,320,000 10,212,000 3,833,000 1960
51 Monroe Street Maryland 840,000 19,984,000 20,824,000 7,172,000 1975
444 North Frederick Avenue (g) Maryland 813,000 5,641,000 6,454,000 950,000 1981
7700 Leesburg Pike Virginia 3,669,000 9,845,000 13,514,000 1,161,000 1976
Arlington Financial Center (g) Virginia 3,000,000 4,481,000 7,481,000 463,000 1963
515 King Street Virginia 4,102,000 5,047,000 9,149,000 649,000 1966
The Lexington Building Maryland 1,180,000 1,873,000 3,053,000 173,000 1970
The Saratoga Building Maryland 1,464,000 2,366,000 3,830,000 321,000 1977
Brandywine Center Maryland 718,000 1,170,000 1,888,000 106,000 1969
Tycon Plaza II Virginia 3,262,000 9,216,000 12,478,000 964,000 1981
Tycon Plaza III Virginia 3,255,000 9,405,000 12,660,000 932,000 1978
6110 Executive Boulevard Maryland 4,621,000 14,465,000 19,086,000 1,826,000 1971
1220 19th Street Washington, D.C. 7,802,000 11,905,000 19,707,000 1,283,000 1976
Maryland Trade Center I Maryland 3,330,000 14,981,000 18,311,000 1,329,000 1981
Maryland Trade Center II Maryland 2,826,000 10,107,000 12,933,000 916,000 1984
1600 Wilson Boulevard Virginia 6,661,000 17,331,000 23,992,000 704,000 1973
7900 Westpark Drive Virginia 12,049,000 66,631,000 78,680,000 2,430,000 1972/1986
8230 Boone Boulevard Virginia 1,417,000 6,760,000 8,177,000 66,000 1981
Woodburn Medical Park I Virginia 2,563,000 12,530,000 15,093,000 52,000 1984
Woodburn Medical Park II Virginia 2,632,000 17,612,000 20,244,000 73,000 1988
--------- ---------- ---------- ----------
67,318,000 255,834,000 323,152,000 27,155,000
---------- ----------- ----------- ----------
Retail Centers
Concord Centre Virginia 413,000 3,722,000 4,135,000 1,240,000 1960
Bradlee Virginia 4,152,000 10,769,000 14,921,000 3,466,000 1955
Clairmont Maryland 155,000 1,896,000 2,051,000 834,000 1965
Chevy Chase Metro Plaza Washington, D.C. 1,549,000 7,315,000 8,864,000 1,698,000 1975
Prince William Plaza Virginia 171,000 1,808,000 1,979,000 964,000 1967
Takoma Park Maryland 415,000 1,101,000 1,516,000 793,000 1962
Westminster Maryland 553,000 3,690,000 4,243,000 2,104,000 1969
Wheaton Park Maryland 623,000 4,259,000 4,882,000 731,000 1967
Montgomery Village Center Maryland 11,624,000 10,005,000 21,629,000 1,139,000 1969
Shoppes of Foxchase Virginia 5,838,000 4,094,000 9,932,000 416,000 1960
Frederick County Square (e) Maryland 6,561,000 8,134,000 14,695,000 877,000 1973
South Washington St. Virginia 2,624,000 3,546,000 6,170,000 64,000 1959
--------- --------- --------- ------
34,678,000 60,339,000 95,017,000 14,326,000
---------- ---------- ---------- ----------
Date of Net Rentable Depreciation
Properties Location Acquisition Square Feet (f) Units Life (c)
- ----------------------------- --------------- ----------- --------------- ----- --------
Office Buildings
10400 Connecticut Avenue Maryland August 1979 65,000 31 Years
1901 Pennsylvania Avenue Washington, D.C. May 1977 97,000 28 Years
51 Monroe Street Maryland August 1979 210,000 41 Years
444 North Frederick Avenue (g) Maryland October 1989 66,000 50 Years
7700 Leesburg Pike Virginia October 1990 145,000 50 Years
Arlington Financial Center (g) Virginia June 1992 51,000 50 Years
515 King Street Virginia July 1992 78,000 50 Years
The Lexington Building Maryland November 1993 47,000 50 Years
The Saratoga Building Maryland November 1993 59,000 50 Years
Brandywine Center Maryland November 1993 35,000 50 Years
Tycon Plaza II Virginia June 1994 131,000 50 Years
Tycon Plaza III Virginia June 1994 152,000 50 Years
6110 Executive Boulevard Maryland January 1995 199,000 30 Years
1220 19th Street Washington, D.C. November 1995 104,000 30 Years
Maryland Trade Center I Maryland May 1996 191,000 30 Years
Maryland Trade Center II Maryland May 1996 159,000 30 Years
1600 Wilson Boulevard Virginia October 1997 167,000 30 Years
7900 Westpark Drive Virginia November 1997 478,000 30 Years
8230 Boone Boulevard Virginia September 1998 58,000 30 Years
Woodburn Medical Park I Virginia November 1998 71,000 30 Years
Woodburn Medical Park II Virginia November 1998 96,000 30 Years
---------
2,659,000
---------
Retail Centers
Concord Centre Virginia December 1973 76,000 33 Years
Bradlee Virginia December 1984 168,000 40 Years
Clairmont Maryland December 1976 40,000 39 Years
Chevy Chase Metro Plaza Washington, D.C. September 1985 51,000 50 Years
Prince William Plaza Virginia August 1968 55,000 50 Years
Takoma Park Maryland July 1963 59,000 50 Years
Westminster Maryland September 1972 165,000 37 Years
Wheaton Park Maryland September 1977 71,000 49 Years
Montgomery Village Center Maryland December 1992 196,000 50 Years
Shoppes of Foxchase Virginia June 1994 128,000 50 Years
Frederick County Square (e) Maryland August 1995 233,000 30 Years
South Washington St. Virginia June 1998 45,000 30 Years
---------
1,287,000
---------
42
<PAGE>
Schedule III
(Continued)
Washington Real Estate Investment Trust and Subsidiaries
Summary of Real Estate Investments and Accumulated Depreciation
Net
Initial Cost (b) Improvements
---------------- ------------
Properties Location Building (Retirements)
----------- ---------- and since
Apartment Buildings Land Improvements Acquisition
---- ------------ -----------
Country Club Towers Virginia $ 299,000 $2,561,000 $2,677,000
Munson Hill Towers Virginia (a) - 3,337,000 4,161,000
Park Adams Virginia 287,000 1,654,000 3,506,000
Roosevelt Towers Virginia 336,000 1,996,000 1,851,000
3801 Connecticut Avenue Washington, D.C. 420,000 2,678,000 4,412,000
The Ashby at McLean Virginia 4,356,000 17,125,000 2,013,000
Walker House Apartments Virginia 2,851,000 7,946,000 565,000
Bethesda Hill Maryland 3,900,000 13,338,000 894,000
---------- ---------- ----------
12,449,000 50,635,000 20,079,000
Industrial Distribution /Flex
Property
Pepsi-Cola Maryland 760,000 1,792,000 1,560,000
Capitol Freeway Center Washington, D.C. 300,000 1,205,000 2,627,000
Department of Commerce (g) Virginia 347,000 1,009,000 1,356,000
Fullerton Virginia 950,000 3,317,000 832,000
V Street Distribution Center Washington, D.C. 126,000 317,000 201,000
Charleston Business Center Maryland 2,045,000 2,091,000 247,000
Tech 100 Industrial Park Maryland 2,086,000 4,744,000 417,000
Crossroads Distribution Center Maryland 894,000 1,945,000 146,000
The Alban Business Center Virginia 878,000 3,298,000 375,000
The Earhart Building Virginia 916,000 4,128,000 103,000
Ammendale Technology Park I Maryland 1,335,000 6,492,000 406,000
Ammendale Technology Park II Maryland 862,000 5,016,000 266,000
Pickett Industrial Park Virginia 3,300,000 4,899,000 491,000
Northern VA Industrial Park Virginia 5,092,000 26,461,000 -
8900 Telegraph Road Virginia 372,000 1,538,000 -
---------- ---------- ---------
20,263,000 68,252,000 9,027,000
---------- ---------- ---------
Totals $134,708,000 $370,494,000 $93,672,000
============ ============ ===========
Gross Amounts at which carried at Accumulated
December 31, 1998 Depreciation
-----------------
Properties Location Buildings at
----------- ---------- and December 31, Date of
Apartment Buildings Land Improvements Total (d) 1998 Construction
---- ------------ --------- ---- ------------
Country Club Towers Virginia $ 299,000 $5,238,000 $ 5,537,000 $ 2,956,000 1965
Munson Hill Towers Virginia (a) - 7,498,000 7,498,000 4,020,000 1963
Park Adams Virginia 287,000 5,160,000 5,447,000 2,301,000 1959
Roosevelt Towers Virginia 336,000 3,847,000 4,183,000 2,152,000 1964
3801 Connecticut Avenue Washington, D.C. 420,000 7,090,000 7,510,000 3,938,000 1951
The Ashby at McLean Virginia 4,356,000 19,138,000 23,494,000 1,442,000 1982
Walker House Apartments Virginia 2,851,000 8,511,000 11,362,000 743,000 1971
Bethesda Hill Maryland 3,900,000 14,232,000 18,132,000 513,000 1986
--------- ---------- ---------- ----------
12,449,000 70,714,000 83,163,000 18,065,000
---------- ---------- ---------- ----------
Industrial Distribution /Flex
Property
Pepsi-Cola Maryland 760,000 3,352,000 4,112,000 714,000 1971
Capitol Freeway Center Washington, D.C. 300,000 3,832,000 4,132,000 1,842,000 1940
Department of Commerce (g) Virginia 347,000 2,365,000 2,712,000 1,669,000 1964
Fullerton Virginia 950,000 4,149,000 5,099,000 1,142,000 1980
V Street Distribution Center Washington, D.C. 126,000 518,000 644,000 255,000 1960
Charleston Business Center Maryland 2,045,000 2,338,000 4,383,000 262,000 1973
Tech 100 Industrial Park Maryland 2,086,000 5,161,000 7,247,000 601,000 1990
Crossroads Distribution Center Maryland 894,000 2,091,000 2,985,000 201,000 1987
The Alban Business Center Virginia 878,000 3,673,000 4,551,000 293,000 1981
The Earhart Building Virginia 916,000 4,231,000 5,147,000 283,000 1987
Ammendale Technology Park I Maryland 1,335,000 6,898,000 8,233,000 434,000 1985
Ammendale Technology Park II Maryland 862,000 5,282,000 6,144,000 319,000 1986
Pickett Industrial Park Virginia 3,300,000 5,390,000 8,690,000 192,000 1973
Northern VA Industrial Park Virginia 5,092,000 26,461,000 31,553,000 534,000 1968/1991
8900 Telegraph Road Virginia 372,000 1,538,000 1,910,000 14,000 1985
---------- ---------- ---------- -----------
20,263,000 77,279,000 97,542,000 8,755,000
---------- ---------- ---------- -----------
$134,708,000 $464,166,000 $598,874,000 $68,301,000
============ ============ ============ ===========
Date of Net Rentable Depreciation
Properties Location Acquisition Square Feet (f) Units Life (c)
---------- -------- ----------- --------------- ----- --------
Apartment Buildings
Country Club Towers Virginia July 1969 276,000 227 35 Years
Munson Hill Towers Virginia January 1970 340,000 279 33 Years
Park Adams Virginia January 1969 210,000 200 35 Years
Roosevelt Towers Virginia May 1965 229,000 191 40 Years
3801 Connecticut Avenue Washington, D.C. January 1963 242,000 307 30 Years
The Ashby at McLean Virginia August 1996 349,000 250 30 Years
Walker House Apartments Virginia March 1996 148,000 196 30 Years
Bethesda Hill Maryland November 1997 226,000 195 30 Years
2,020,000 1,845
--------- -----
Industrial Distribution /Flex
Property
Pepsi-Cola Maryland October 1987 69,000 40 Years
Capitol Freeway Center Washington, D.C. July 1974 145,000 25 Years
Department of Commerce (g) Virginia December 1971 105,000 43 Years
Fullerton Virginia September 1985 103,000 50 Years
V Street Distribution Center Washington, D.C. October 1973 31,000 40 Years
Charleston Business Center Maryland November 1993 85,000 50 Years
Tech 100 Industrial Park Maryland May 1995 167,000 30 Years
Crossroads Distribution Center Maryland December 1995 85,000 30 Years
The Alban Business Center Virginia October 1996 87,000 30 Years
The Earhart Building Virginia December 1996 92,000 30 Years
Ammendale Technology Park I Maryland February 1997 167,000 30 Years
Ammendale Technology Park II Maryland February 1997 108,000 30 Years
Pickett Industrial Park Virginia October 1997 246,000 30 Years
Northern VA Industrial Park Virginia May 1998 790,000 30 Years
8900 Telegraph Road Virginia September 1998 32,000 30 Years
2,312,000
8,278,000 1,845
--------- -----
Notes:
(a) The site of Munson Hill Towers is rented under a ground lease requiring
annual payments of $22,600 until the expiration of the lease in 2060.
(b) The purchase of real estate investments has been divided between land
and buildings and improvements on the basis of management determination
of the values relative to land and buildings.
(c) The useful life shown is for the main structure. Buildings and
improvements are depreciated over various useful lives ranging from 3
to 50 years.
(d) At December 31, 1998, total land, buildings and improvements are
carried at $584,303,000 for federal income tax purposes.
(e) At December 31, 1998, WRIT was obligated under the following mortgage
encumbrances: the $7,321,000 mortgage note payable on Frederick County
Square, the $9,226,000 mortgage note payable on Woodburn Medical Park
I, and the $12,365,000 mortgage payable on Woodburn Medical Park II.
(f) Residential properties are presented in gross square feet.
(g) Properties were sold subsequent to December 31, 1998.
</TABLE>
43
<PAGE>
<TABLE>
Schedule III
(Continued)
Washington Real Estate Investment Trust and Subsidiaries
Summary of Real Estate Investments and Accumulated Depreciation
(In thousands)
The following is a reconciliation of real estate assets and accumulated
depreciation for the years ended December 31, 1998, 1997 and 1996:
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Real Estate Assets
Balance, beginning of period $504,315 $352,579 $272,597
Additions - property acquisitions 82,210 138,802 69,888
- improvements 18,652 13,915 11,972
Deductions - write-off of fully depreciated asset - (981) (1,878)
Deductions - property sales (6,303) - -
------ ------ ------
Balance, end of period $598,874 $504,315 $352,579
======== ======== ========
Accumulated Depreciation
Balance, beginning of period $ 56,015 $46,639 $ 41,021
Additions - depreciation 14,566 10,357 7,496
Deductions - write-off of fully depreciated assets - (981) (1,878)
Deductions - property sales (2,280) - -
------ ------ ------
Balance, end of period $ 68,301 $56,015 $ 46,639
========= ======= =========
</TABLE>
44
<PAGE>
<TABLE>
Washington Real Estate Investment Trust and Subsidiaries
Supplementary Information:
Quarterly Financial Results (Unaudited)
(In thousands, except per share data)
Quarter
-------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1998:
Real estate rental revenue $24,501 $25,413 $26,243 $27,440
Net income 14,499 8,351 8,277 9,937
Net income per share $0.41 $0.23 $0.23 $0.28
1997:
Real estate rental revenue $18,498 $19,104 $19,436 $22,391
Net income 7,028 7,140 7,664 8,304
Net income per share $0.22 $0.22 $0.23 $0.23
1996:
Real estate rental revenue $14,681 $15,830 $17,056 $17,974
Net income 6,952 7,083 6,848 7,081
Net income per share $0.22 $0.22 $0.22 $0.22
45
</TABLE>
EXHIBIT 22
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated February 9, 1999 included in Washington Real
Estate Investment Trust's Form 10-K for the year ended December 31, 1998, into
Washington Real Estate Investment Trust's previously filed Registration
Statements on Form S-8, File No. 33-63671, Form S-3, Filed No. 333-23157, Form
S-8, File No. 333-48081 and Form S-4, File No. 333-48293.
ARTHUR ANDERSEN, LLP
Washington, D.C.
March 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,595
<SECURITIES> 0
<RECEIVABLES> 4,130
<ALLOWANCES> 821
<INVENTORY> 0
<CURRENT-ASSETS> 8,725
<PP&E> 598,874
<DEPRECIATION> 68,301
<TOTAL-ASSETS> 558,707
<CURRENT-LIABILITIES> 20,535
<BONDS> 282,912
357
0
<COMMON> 0
<OTHER-SE> 253,376
<TOTAL-LIABILITY-AND-EQUITY> 558,707
<SALES> 103,597
<TOTAL-REVENUES> 111,241
<CGS> 31,114
<TOTAL-COSTS> 46,513
<OTHER-EXPENSES> 6,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,106
<INCOME-PRETAX> 41,064
<INCOME-TAX> 0
<INCOME-CONTINUING> 41,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,064
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
