SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NO. 1-6622
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
MARYLAND 53-0261100
-------------------------------- ---------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
</TABLE>
6110 EXECUTIVE BOULEVARD, ROCKVILLE, MARYLAND 20852
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (301) 984-9400
(Former name, former address and former fiscal year,
if changed since last report)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the close of the period covered by this report.
SHARES OF BENEFICIAL INTEREST 35,709,789
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO ____
1
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WASHINGTON REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
INDEX
Page
Part I: Financial Information
Item l. Financial Statements
<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 13
Part II: Other Information
Item l. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
Part I
FINANCIAL INFORMATION
The information furnished in the accompanying Consolidated Balance Sheets,
Statements of Income, Statements of Cash Flows and Statement of Changes in
Shareholders' Equity reflect all adjustments, consisting of normal recurring
items, which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and of cash flows
for the interim periods. The accompanying financial statements and notes thereto
should be read in conjunction with the financial statements and notes for the
three years ended December 31, 1998 included in the Trust's 1998 Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
2
<PAGE>
Part I
Item I. Financial Statements
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
--------------- ---------------
Assets
<S> <C> <C>
Real estate at cost $631,985 $598,874
Accumulated depreciation (73,525) (68,301)
--------------- ---------------
Total investment in real estate 558,460 530,573
Cash and temporary investments 5,320 4,595
Rents and other receivables, net of allowance for doubtful
accounts of $928 and $821, respectively 4,741 4,130
Prepaid expenses and other assets 17,290 19,409
--------------- ---------------
$585,811 $558,707
=============== ===============
Liabilities
Accounts payable and other liabilities $13,795 $13,524
Tenant security deposits 4,825 4,331
Advance rents 2,319 2,680
Mortgage notes payable 28,642 28,912
Lines of credit payable 66,000 44,000
Notes payable 210,000 210,000
--------------- ---------------
325,581 303,447
--------------- ---------------
Minority interest 1,545 1,527
--------------- ---------------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000,000
shares authorized: 35,710 and 35,692 shares issued
and outstanding at June 30, 1999 and December 31,
1998, respectively 357 357
Additional paid-in capital 258,328 253,376
--------------- ---------------
258,685 253,733
--------------- ---------------
$585,811 $558,707
=============== ===============
</TABLE>
See accompanying notes to financial statements
3
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WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real estate rental revenue $28,864 $25,413 $56,518 $49,914
Real estate expenses (8,595) (7,812) (17,100) (14,942)
------------- ----------- ----------- ------------
Operating income 20,269 17,601 39,418 34,972
Depreciation and amortization (4,644) (3,743) (9,095) (7,383)
------------- ----------- ----------- ------------
Income from real estate 15,625 13,858 30,323 27,589
Other income 232 316 437 547
Interest expense (5,386) (4,237) (10,607) (8,015)
General and administrative (1,706) (1,650) (2,939) (3,178)
------------- ----------- ----------- ------------
Income before gain on sale of real estate 8,765 8,287 17,214 16,943
------------- ----------- ----------- ------------
Gain on sale of real estate - 64 7,909 5,926
------------- ----------- ----------- ------------
Net Income $8,765 $8,351 $25,123 $22,869
============= =========== =========== ============
Per share information based on the
weighted average number
of shares outstanding
Shares-- Basic 35,710 35,685 35,709 35,685
Shares-- Diluted 35,732 35,805 35,730 35,798
Net income per share-- Basic $0.25 $0.23 $0.70 $0.64
============= =========== =========== ============
Net income per share-- Diluted $0.25 $0.23 $0.70 $0.64
============= =========== =========== ============
Dividends paid $0.2925 $0.28 $0.5725 $0.55
============= =========== =========== ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Additional Shareholders'
Shares Par Value Paid in Capital Equity
----------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 35,692 $357 $253,376 $253,733
Net income 25,123 25,123
Dividends (20,444) (20,444)
Share Options Exercised 18 0 273 273
----------------- -------------- -------------- ------------
Balance, June 30, 1999 35,710 $357 $258,328 $258,685
================= ============== ============== ============
</TABLE>
See accompanying notes to financial statements
5
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WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30,
1999 1998
----------- -----------
Cash Flow From Operating Activities
<S> <C> <C>
Net income $25,123 $22,869
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (7,909) (5,926)
Depreciation and amortization 9,095 7,383
Changes in other assets 933 388
Changes in other liabilities 596 4,675
----------- -----------
Net cash provided by operating activities 27,838 29,389
----------- -----------
Cash Flow From Investing Activities
Capital improvements to real estate (8,524) (7,847)
Non-real estate capital improvements (129) (320)
Real estate acquisitions (41,879) (35,342)
Cash received for sale of real estate 22,033 9,239
----------- -----------
Net cash used in investing activities (28,499) (34,270)
----------- -----------
Cash Flow From Financing Activities
Dividends paid (20,444) (19,626)
Net proceeds from debt offering - 102,797
Borrowings - Lines of credit 22,000 17,000
Repayments - Lines of credit - (95,250)
Principal payments - Mortgage note payable (270) (69)
Share options exercised 100 195
----------- -----------
Net cash provided by financing activities 1,386 5,047
----------- -----------
Net increase in cash and temporary investments 725 166
Cash and temporary investments at beginning of year 4,595 7,908
----------- -----------
Cash and temporary investments at end of period $5,320 $8,074
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the first six months for interest $10,068 $4,690
=========== ===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (Unaudited)
NOTE 1: NATURE OF BUSINESS
Washington Real Estate Investment Trust ("WRIT") is a self-administered
qualified equity real estate investment trust, successor to a trust organized in
1960. The Trust's business consists of the ownership of income-producing real
estate properties in the greater Washington - Baltimore Region.
WRIT operates in a manner intended to enable it to qualify as a real estate
investment trust under the Internal Revenue Code (the "Code"). In accordance
with the Code, a trust which distributes its capital gains and at least 95% of
its taxable income to its shareholders each year, and which meets certain other
conditions, will not be taxed on that portion of its taxable income which is
distributed to its shareholders. Accordingly, no provision for Federal income
taxes is required.
NOTE 2: ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
WRIT believes that the disclosures made are adequate to make the information
presented not misleading.
Comprehensive Income
WRIT has no items of comprehensive income that would require separate reporting
in the accompanying consolidated statements of income.
Earnings Per Common Share
"Basic earnings per share" is computed as net income divided by the weighted
average common shares outstanding. "Diluted earnings per share" is computed as
net income divided by the total weighted average common shares outstanding plus
the effect of dilutive common equivalent shares outstanding for the period.
Dilutive common equivalent shares reflect the assumed issuance of additional
common shares pursuant to certain of WRIT's share based compensation plans that
could potentially reduce or "dilute" earnings per share, based on the treasury
stock method.
New Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This statement (as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133) establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively
7
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (Unaudited)
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, 2000. Although WRIT currently
has no derivative instruments that this statement would apply to, it could
affect certain derivative instruments acquired by WRIT in future periods.
Revenue Recognition
Residential properties are leased under operating leases with terms of generally
one year or less, and commercial properties are leased under operating leases
with average terms of three to five years. WRIT recognizes rental income from
its residential and commercial leases when earned and accounts for all rental
abatements on a straight-line basis.
Deferred Financing Costs
Costs associated with the issuance of notes payable are capitalized and
amortized using the effective interest rate method over the term of the related
notes.
Real Estate and Depreciation
Buildings are depreciated on a straight-line basis over estimated useful lives
not exceeding 50 years. Effective January 1, 1995, WRIT revised its estimate of
useful lives for major capital improvements to real estate. All capital
improvement expenditures associated with replacements, improvements, or major
repairs to real property are depreciated using the straight-line method over
their estimated useful lives ranging from 3 to 30 years. All tenant improvements
are amortized using the straight-line method over 5 years or the term of the
lease if it differs significantly from 5 years. Capital improvements placed in
service prior to January 1, 1995 will continue to be depreciated on a
straight-line basis over their previously estimated useful lives not exceeding
30 years. Maintenance and repair costs are charged to expense as incurred.
WRIT recognizes impairment losses on long-lived assets used in operations when
indicators of impairment are present and the net undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. No such losses were recorded during 1999.
Cash and Temporary Investments
Cash and temporary investments includes cash equivalents with original
maturities of 90 days or less.
8
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (Unaudited)
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 3: REAL ESTATE INVESTMENTS
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C. and Virginia as follows:
June 30, 1999
(In Thousands)
--------------
Office buildings $341,459
Industrial distribution centers 109,883
Apartment buildings 84,513
Shopping centers 96,130
--------
$631,985
========
WRIT acquired the following properties during 1999:
<TABLE>
<CAPTION>
Acquisition
Property Property Rentable Cost (in
Acquisition Date Name Type Square Feet thousands)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 27, 1999 Dulles South IV Industrial 83,000 $ 6,909
April 16, 1999 Sully Square Industrial 95,000 $ 7,557
May 21, 1999 600 Jefferson Plaza Office 115,000 $14,472
May 21, 1999 1700 Research Boulevard Office 103,000 $12,941
------------------------------
Total 396,000 $41,879
==============================
</TABLE>
NOTE 4: UNSECURED LINES OF CREDIT PAYABLE
As of June 30, 1999, WRIT had two unsecured credit commitments in the amount of
$50 million and $25 million. $66 million was outstanding under the credit
commitments as of June 30, 1999 leaving $9 million available. Under the terms of
the credit commitments, interest only is payable monthly, in arrears, on the
unpaid principal balance. Amounts outstanding under the credit commitments
during the six months ended June 30, 1999 bore interest at rates ranging from
5.54% to 6.23% per annum. All new advances will bear interest at LIBOR plus a
spread based on WRIT's credit rating on its publicly issued debt. All unpaid
interest and principal can be prepaid prior to the expiration of WRIT's interest
rate lock-in periods subject to a yield maintenance obligation.
9
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (Unaudited)
The $50 million credit commitment requires WRIT to pay the lender unused
commitment fees at the rate of 0.175% per annum on the amount by which the
unused portion of the commitment exceeds the balance of outstanding advances and
term loans. The $25 million credit commitment requires WRIT to pay the lender a
facility management fee of 0.175% per annum on the commitment amount of $25
million. These fees are payable quarterly. The credit commitments also contain
certain financial covenants related to debt, net worth, and cash flow, and
non-financial covenants which WRIT has met as of June 30, 1999.
NOTE 5: NOTES PAYABLE
On August 13, 1996 WRIT sold $50 million of 7.125% 7-year unsecured notes due
August 13, 2003, and $50 million of 7.25% unsecured 10-year notes due August 13,
2006. The 7-year notes were sold at 99.107% of par and the 10-year notes were
sold at 98.166% of par. Net proceeds to the Trust after deducting underwriting
expenses were $97.6 million. The 7-year notes bear an effective interest rate of
7.46%, and the 10 year notes bear an effective interest rate of 7.49%, for a
combined effective interest rate of 7.47%. WRIT used the proceeds of these notes
to pay down its lines of credit and to finance acquisitions and capital
improvements to its properties.
On February 20, 1998, WRIT sold $50 million of 7.25% unsecured notes due
February 25, 2028 at 98.653% to yield approximately 7.36%. WRIT also sold $60
million in unsecured Mandatory Par Put Remarketed Securities ("MOPPRS") at an
effective borrowing rate through the remarketing date (February 2008) of
approximately 6.74%. The net proceeds to WRIT after deducting loan origination
fees was $102.7 million. WRIT used the proceeds of these notes for general
business purposes, including repayment of outstanding advances under its lines
of credit and to finance acquisitions and capital improvements to its
properties. WRIT's costs of the borrowings of approximately $7.2 million will be
amortized over the lives of the notes using the effective interest method.
These notes contain certain financial and non-financial covenants which WRIT has
met as of June 30, 1999.
NOTE 6: SALE OF REAL ESTATE
On February 8, 1999, WRIT sold two office buildings, 444 N. Frederick Road and
Arlington Financial Center and one industrial distribution facility, Department
of Commerce. The properties were sold for approximately $21.5 million in cash
resulting in a gain of approximately $7.8 million. On February 26, 1999, WRIT
sold the V Street Distribution Center for $0.6 million in cash resulting in a
gain of approximately $0.1 million. WRIT used the proceeds from these sales
towards the purchase of Sully Square industrial property and 600 Jefferson Plaza
and 1700 Research Boulevard office properties, thereby deferring income taxes
related to the taxable gain on sale.
NOTE 7: SEGMENT INFORMATION
WRIT has four reportable segments: Office Buildings, Industrial Distribution
Centers, Apartment Buildings and Shopping Centers. Office Buildings represent
51% of real estate rental revenue and provide office space for various types of
businesses. Industrial Distribution Centers represent 14% of real estate rental
revenue and are used for warehousing and distribution. Apartment Buildings
represent 19% of real estate rental revenue. These properties provide housing
for families throughout the Washington Metropolitan area. Shopping Centers
represent the
10
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (Unaudited)
remaining 16% of real estate rental revenue and are typically grocery store or
drug store anchored centers and retail outlets for a variety of stores.
The accounting policies of the segments are the same as those described in Note
2. WRIT evaluates performance based upon operating income from the combined
properties in each segment. WRIT's reportable segments are consolidations of
similar properties. They are managed separately because each segment requires
different operating, pricing and leasing strategies. All of these properties
have been acquired separately and are incorporated into the applicable segment.
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended June 30, 1999
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate rental revenue $14,845 $3,914 $5,489 $4,616 $- $28,864
Real estate expenses 4,578 865 2,079 1,073 - 8,595
---------------------------------------------------------------------------------------
Operating income 10,267 3,049 3,410 3,543 - 20,269
Depriciation and amortization 2,606 814 664 560 - 4,644
---------------------------------------------------------------------------------------
Income from real estate 7,661 2,235 2,746 2,983 - 15,625
Other income - - - - 232 232
Interest expense (413) - - (164) (4,809) (5,386)
General and administrative - - - - (1,706) (1,706)
=======================================================================================
Net income before gain on sale
of real estate $7,248 $2,235 $2,746 $2,819 $(6,283) $8,765
=======================================================================================
Capital investments $29,286 $8,113 $621 $116 $90 $38,226
=======================================================================================
Total assets $314,150 $102,772 $65,538 $84,217 $19,134 $585,811
=======================================================================================
(in thousands)
Three Months Ended June 30, 1998
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
---------------------------------------------------------------------------------------
Real estate rental revenue $12,555 $3,256 $5,290 $4,312 $- $25,413
Real estate expenses 4,219 655 2,014 924 - 7,812
---------------------------------------------------------------------------------------
Operating income 8,336 2,601 3,276 3,388 - 17,601
Depriciation and amortization 2,061 542 648 492 - 3,743
---------------------------------------------------------------------------------------
Income from real estate 6,275 2,059 2,628 2,896 - 13,858
Other income - - - - 316 316
Interest expense - - - (167) (4,070) (4,237)
General and administrative - - - - (1,650) (1,650)
=======================================================================================
Net income before gain on sale
of real estate $6,275 $2,059 $2,628 $2,729 $(5,404) $8,287
=======================================================================================
Capital investments $3,292 $29,594 $792 $6,414 $114 $40,206
=======================================================================================
</TABLE>
11
<PAGE>
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Six Months Ended June 30, 1999
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate rental revenue $28,847 $7,742 $10,887 $9,042 $- $56,518
Real estate expenses 9,095 1,759 4,153 2,093 - 17,100
-------------------------------------------------------------------------------------
Operating income 19,752 5,983 6,734 6,949 - 39,418
Depriciation and amortization 5,123 1,560 1,317 1,095 - 9,095
-------------------------------------------------------------------------------------
Income from real estate 14,629 4,423 5,417 5,854 - 30,323
Other income - - - - 437 437
Interest expense (827) - - (328) (9,452) (10,607)
General and administrative - - - - (2,939) (2,939)
=====================================================================================
Net income before gain on sale
of real estate $13,802 $4,423 $5,417 $5,526 $(11,954) $17,214
=====================================================================================
Capital investments $32,171 $15,825 $1,259 $1,148 $129 $50,532
=====================================================================================
(in thousands)
Six Months Ended June 30, 1998
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
-------------------------------------------------------------------------------------
Real estate rental revenue $24,917 $6,117 $10,449 $8,431 $- $49,914
Real estate expenses 8,095 1,212 3,916 1,719 - 14,942
-------------------------------------------------------------------------------------
Operating income 16,822 4,905 6,533 6,712 - 34,972
Depriciation and amortization 4,108 1,002 1,285 988 - 7,383
-------------------------------------------------------------------------------------
Income from real estate 12,714 3,903 5,248 5,724 - 27,589
Other income - - - - 547 547
Interest expense - - - (334) (7,681) (8,015)
General and administrative - - - - (3,178) (3,178)
=====================================================================================
Net income before gain on sale
of real estate $12,714 $3,903 $5,248 $5,390 $(10,312) $16,943
=====================================================================================
Capital investments $5,220 $29,898 $1,097 $6,975 $320 $43,510
=====================================================================================
</TABLE>
12
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
WRIT's Management's Discussion and Analysis of Financial Condition and Results
of Operations contains statements that may be considered forward looking.
Although WRIT believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Factors that could cause actual results to
differ materially from WRIT's current expectations include general economic
conditions, local real estate conditions, the performance of properties that
WRIT has acquired or may acquire and other risks, detailed from time to time in
the WRIT's past and future SEC reports.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Three Months Ended June 30,
1999 Compared to the Three Months Ended June 30, 1998
Total revenues for the second quarter of 1999 increased 13.6% ($3.5 million) to
$28.9 million from $25.4 million in the second quarter of 1998. Operating income
increased 15.2% ($2.7 million) to $20.3 million from $17.6 million in the second
quarter of 1998.
For the second quarter of 1999, WRIT's office buildings had increases of 18.2%
in revenues and 23.2% in operating income, over the second quarter of 1998.
These increases were primarily due to the acquisitions of 8230 Boone Boulevard
in September 1998, Woodburn Medical Park in November 1998 and 600 Jefferson
Plaza and 1700 Research Boulevard in May 1999 offset in part by the sale of 444
N. Frederick and Arlington Financial Center in February 1999, and increased core
portfolio operating income. Comparing those office buildings owned by WRIT for
the entire second quarters of 1998 and 1999, revenue and operating income
increased 7.3% and 11.1% respectively. These increases in revenues and operating
income were primarily due to increases in rental rates, occupancy and tenant
pass through expense recoveries across the sector. Operating income was
partially offset by an increase of $0.4 million (8.5%) in real estate expenses
in the second quarter of 1999.
For the second quarter of 1999, WRIT's industrial distribution center revenues
and operating income increased 20.2% and 17.2% respectively, over the second
quarter of 1998. This was primarily due to the acquisitions of Northern Virginia
Industrial Park in May 1998, 8900 Telegraph Road in September 1998, Dulles South
IV in January 1999 and Sully Square in April 1999, offset in part by the sale of
Department of Commerce and V Street Distribution Center in February 1999, and
due to increased core portfolio operating income. Comparing those industrial
distribution centers owned by WRIT for the entire second quarters of 1998 and
1999, revenue and operating income increased by 4.2% and 4.3% respectively.
These increases in revenues and operating income were primarily due to increased
rental rates and occupancy. Operating income was partially offset by an increase
of $0.2 million (32.1%) in real estate expenses in the second quarter of 1999.
For the second quarter of 1999, WRIT's apartment revenues and operating income
increased 3.8% and 4.1% respectively over the second quarter of 1998. These
increases were primarily due to increased rental and
13
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
occupancy rates. WRIT did not purchase or sell any apartment properties in 1998
or thus far in 1999.
For the second quarter of 1999, WRIT's shopping center revenues and operating
income increased 7.1% and 4.6% respectively over the second quarter of 1998.
These increases were primarily due to the acquisition of 800 South Washington
Street in June 1998, offset in part by the sale of Dover Mart in December 1998,
and due to increased core portfolio revenues and operating income. Comparing
those shopping centers owned by WRIT for the entire second quarters of 1998 and
1999, revenue and operating income increased by 8.9% and 10.1% respectively.
These increases were primarily due to increased rental and occupancy rates,
decreased bad debt expense and increased tenant pass through expense recoveries.
Operating income was partially offset by an increase of $0.1 million (16.1%) in
real estate expenses in the second quarter of 1999.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Six Months Ended June 30,
1999 Compared to the Six Months Ended June 30, 1998
Total revenues for the first six months of 1999 increased 13.2% ($6.6 million)
to $56.5 million from $49.9 million for the first six months of 1998. Operating
income increased 12.6% ($4.4 million) to $39.4 million from $35.0 million in the
second quarter of 1998.
For the first six months of 1999, WRIT's office buildings had increases of 15.8%
in revenues and 17.4% in operating income, over the first six months of 1998.
These increases were primarily due to the acquisitions of 8230 Boone Boulevard
in September 1998, Woodburn Medical Park in November 1998 and 600 Jefferson
Plaza and 1700 Research Boulevard in May 1999 offset in part by the sale of 444
N. Frederick and Arlington Financial Center in February 1999, and increased core
portfolio operating income. Comparing those office buildings owned by WRIT for
the first six months of 1998 and 1999, revenue and operating income increased
7.4% and 7.6% respectively. These increases in revenues and operating income
were due to increases in rental rates, occupancy, antenna rent and tenant pass
through expense recoveries across the sector. Operating income was partially
offset by an increase of $1.0 million (12.4%) in real estate expenses in the
second quarter of 1999.
For the first six months of 1999, WRIT's industrial distribution center revenues
and operating income increased 26.6% and 22.0% respectively, over the first six
months of 1998. This was primarily due to the acquisitions of Northern Virginia
Industrial Park in May 1998, 8900 Telegraph Road in September 1998, Dulles South
IV in January 1999 and Sully Square in April 1999, offset in part by the sale of
Department of Commerce and V Street Distribution Center in February 1999, and
due to increased core portfolio operating income. Comparing those industrial
distribution centers owned by WRIT for the first six months of 1998 and 1999,
revenue and operating income increased by 6.0% and 3.8% respectively. These
increases in revenues and operating income were primarily due to increased
rental rates and tenant pass through expense recoveries. Operating income was
partially offset by an increase of $0.5 million (45.1%) in real estate expenses
in the second quarter of 1999.
For the first six months of 1999, WRIT's apartment revenues and operating income
increased 4.2% and 3.1% respectively over the first six months of 1998. These
increases were primarily due to increased rental and occupancy rates. Operating
income was partially offset by an increase of $0.2 million (6.1%) in real estate
expenses in the second quarter of 1999. WRIT did not purchase any apartment
properties in 1998 or thus far in 1999.
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the first six months of 1999, WRIT's shopping center revenues and operating
income increased 7.2% and 3.5% respectively over the first six months of 1998.
These increases were primarily due to the acquisition of 800 South Washington
Street in June 1998, offset in part by the sale of Dover Mart in December 1998,
and due to increased core portfolio revenues. Comparing those shopping centers
owned by WRIT for the first six months of 1998 and 1999, revenue and operating
income increased by 3.7% and 2.8% respectively. These increases were primarily
due to increased rental and occupancy rates, decreased bad debt expense and
increased tenant pass through expense recoveries. Operating income was partially
offset by an increase of $0.4 million (21.8%) in real estate expenses in the
second quarter of 1999.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended June
30, 1999 Compared to the Three Months Ended June 30, 1998
Real estate expenses increased $0.8 million or 10.0% to $8.6 million as compared
to $7.8 million for the second quarter of 1998. This increase is primarily due
to expenses relating to properties acquired in 1998 and 1999 partially offset by
the impact of the properties sold in 1998 and 1999 as well as an increase of
2.1% in core portfolio operating expense.
Depreciation and amortization expense increased $0.9 million or 24.1% to $4.6
million as compared to $3.7 million for the second quarter of 1998. This is
primarily due to 1998 and year to date 1999 acquisitions of $82.2 million and
$41.9 million, respectively, and 1998 and year to date 1999 capital and tenant
improvement expenditures which totaled $18.7 million and $8.5 million,
respectively.
Total interest expense was $5.4 million for the second quarter of 1999 as
compared to $4.2 million for the second quarter of 1998. This increase is
primarily attributable to the assumption of $21.6 million in mortgages in
November 1998 in connection with the acquisition of Woodburn Medical Park and an
increased average balance outstanding on the lines of credit in 1999 due to 1999
property acquisitions. For the second quarter of 1999, notes payable interest
expense was $3.9 million, lines of credit interest expense was $0.9 million and
mortgage interest expense was $0.6 million. For the second quarter of 1998,
notes payable interest expense was $3.9 million, lines of credit interest
expense was $0.1 million and mortgage interest expense was $0.2 million.
General and administrative expenses increased $0.1 million to $1.7 million as
compared to $1.6 million for the second quarter of 1998. The change is primarily
attributable to increased salaries, incentive compensation and shareholder
expenses offset by decreased legal fees. For the second quarter of 1999, general
and administrative expenses as a percentage of revenue were 5.9% as compared to
6.5% for the second quarter of 1998.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Six Months Ended June 30,
1999 Compared to the Six Months Ended June 30, 1998
Real estate expenses increased $2.2 million or 12.6% to $17.1 million as
compared to $14.9 million for the first six months of 1998. This increase is
primarily due to expenses relating to properties acquired in 1998 and 1999
15
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
as well as increased utilities, repairs and maintenance, operating services and
common area maintenance expenses in 1999 as compared to 1998 due to milder
weather conditions in the first quarter of 1998 partially offset by the impact
of the properties sold in 1998 and 1999.
Depreciation and amortization expense increased $1.7 million or 23.2% to $9.1
million as compared to $7.4 million for the first six months of 1998. This is
primarily due to 1998 and year to date 1999 acquisitions of $82.2 million and
$41.9 million, respectively, and 1998 and year to date 1999 capital and tenant
improvement expenditures which totaled $18.7 million and $8.5 million,
respectively.
Total interest expense was $10.6 million for the first six months of 1999 as
compared to $8.0 million for the second quarter of 1998. This increase is
primarily attributable to the issuance of $110.0 million in medium term notes in
February 1998, the assumption of $21.6 million in mortgages in November 1998 in
connection with the acquisition of Woodburn Medical Park and an increased
average balance outstanding on the lines of credit in 1999 due to 1999 property
acquisitions. For the first six months of 1999, notes payable interest expense
was $7.9 million, lines of credit interest expense was $1.6 million and mortgage
interest expense was $1.2 million. For the first six months of 1998, notes
payable interest expense was $6.6 million, lines of credit interest expense was
$1.1 million and mortgage interest expense was $0.3 million.
General and administrative expenses decreased $0.2 million to $2.9 million as
compared to $3.2 million for the first six months of 1998. The change is
primarily attributable to decreased incentive compensation and legal fees. For
the first six months of 1999, general and administrative expenses as a
percentage of revenue were 5.2% as compared to 6.4% for the first six months of
1998.
Gain on sale of real estate for the six months ended June 30, 1999 was $7.9
million, resulting from the sale of 444 N. Frederick Road, Arlington Financial
Center, Department of Commerce and V Street Distribution Center. Gain on sale of
real estate for the six months ended June 30, 1998 was $5.9 million, resulting
from the sale of Shirley 395 Business Center and 5410 Port Royal Business
Center.
CAPITAL RESOURCES AND LIQUIDITY
WRIT has utilized the proceeds of share offerings, medium and long-term fixed
interest rate debt, bank lines of credit and cash flow from operations for its
capital needs. External sources of capital are available to WRIT from its
existing unsecured credit commitments and management believes that additional
sources of capital are available from the sale of additional shares, the sale of
medium or long-term notes and/or through secured financing. The funds raised
would be used to pay off any outstanding advances on the Trust's lines of credit
and for new acquisitions and capital improvements.
WRIT has line of credit commitments in place from commercial banks for up to $75
million which bear interest at an adjustable spread over LIBOR based on the
Trust's interest coverage ratio and public debt rating. As of June 30, 1999,
WRIT had $66 million outstanding under its lines of credit. WRIT acquired six
properties in 1998 and four properties in 1999 (as of June 30) for total
acquisition costs of $82.2 million and $41.9 million, respectively. The 1998
acquisitions were primarily financed through line of credit advances, from the
February
16
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1998 issuance of $110.0 million of medium term notes (after repayment of amounts
outstanding under line of credit advances of $95.3 million), the assumption of
mortgages payable of $21.6 million and from the reinvestment of the proceeds
from the sale of three properties in 1998 of $10.8 million. The 1999
acquisitions was financed through line of credit advances and the use of the
proceeds from the property sales in February 1999.
Cash flow from operating activities totaled $27.8 million for the first six
months of 1999, as a result of net income before gain on sale of real estate of
$17.2 million, depreciation and amortization of $9.1 million, decreases in other
assets of $0.9 million and increases in liabilities (other than mortgage note,
senior notes and lines of credit payable) of $0.6 million. The majority of the
increase in cash flow from operating activities was due to a larger property
portfolio and increased rental rates.
Net cash used in investing activities for the first six months of 1999 was $28.5
million, including real estate acquisitions of $41.8 million and capital
improvements to real estate of $8.5 million offset by cash received from sale of
real estate properties of $22.0 million.
Net cash provided by financing activities for the first six months of 1999 was
$1.4 million, including line of credit borrowings of $22.0 million, principal
repayments of $0.3 million on the mortgage notes payable and $20.4 million in
dividends paid. Rental revenue has been the principal source of funds to pay
WRIT's operating expenses, interest expense and dividends to shareholders.
Management believes that WRIT has the liquidity and the capital resources
necessary to meet all of its known obligations and to make additional property
acquisitions and capital improvements when appropriate to enhance long-term
growth.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The only material market risk to which WRIT is exposed is interest rate risk.
WRIT's exposure to market risk for changes in interest rates relates primarily
to refinancing long-term fixed rate obligations, the opportunity cost of fixed
rate obligations in a falling interest rate environment and its variable rate
lines of credit. WRIT primarily enters into debt obligations to support general
corporate purposes including acquisition of real estate properties, capital
improvements and working capital needs. In the past, WRIT has used interest rate
hedge agreements to hedge against rising interest rates in anticipation of
refinancing or new debt issuance.
WRIT's interest rate risk has not changed significantly from its risk as
disclosed in its 1998 Form 10-K.
17
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 not at
all. This inability to recognize or properly treat the year 2000 may cause the
systems to process critical financial and operations information incorrectly.
In 1998, WRIT implemented a new financial reporting system. The implementation
was not done in response to Year 2000 issues but in order to improve reporting
processes. The new system is Year 2000 compliant. Management has implemented a
project to review the remaining operating systems, including building
operations, internal operating systems and third 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 June 30, 1999, the inventory, priority assignment and assessment of
material items phases of each section of the Project had been completed.
Material items are those that WRIT's management believes have a risk involving
the safety of individuals, damage to the environment or property or financial
loss. The testing phases of the Project are currently being performed by the
Trust.
The Building Operations section consists of testing key systems at the property
locations, such as fire detection/ prevention, elevators, heating/ ventilation
and air conditioning, telephone and utility services. The assessment section is
on schedule, and WRIT estimates that approximately 95% of the activities
relating to this section were completed as of June 30, 1999. 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 September 30, 1999. There
have not been any significant repairs or replacements related to this phase of
the project. Contingency planning for this section is underway. All Building
Operations activities are expected to be completed in the fourth quarter of
1999.
The Internal Operating Systems section includes the assessment of existing
hardware and software and, where applicable, the replacement of hardware/
software that is not Year 2000 compliant. The assessment phase is complete, and
WRIT believes that all of the significant hardware and software is Year 2000
compliant. Contingency planning and testing for this section is expected to be
completed by the third quarter 1999. All Internal Operating Systems activities
are expected to be completed by the third quarter 1999.
18
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, documentation and development of
contingency plans is complete as of June 30, 1999. The testing of certain
material vendors is underway with completion scheduled for the fourth quarter of
1999.
Costs
WRIT has not had any material expenditures related to the Year 2000 project as
of June 30, 1999. 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."
19
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At WRIT's annual meeting of the Shareholders on May 24, 1999, the following
members were elected to the Board of Trustees for a period of three years:
Affirmative Votes Negative Votes
------------------------------------------
Ms. Susan J. Williams 31,750,423 (98%) 653,159 (2%)
Mr. Clifford M. Kendall 31,823,452 (98%) 580,132 (2%)
Ms. Williams and Mr. Kendall were elected as successor Trustees for Mr.
William N. Cafritz and Mr. Stanley P. Snyder. Trustees whose term of
office continued after the meeting were Mr. Arthur A. Birney, Mr. John M.
Derrick, Jr., Mr. Edmund B. Cronin, Jr., Mr. John P. McDaniel and Mr.
David M. Osnos.
The Shareholders approved an amendment to the Declaration of Trust
pertaining to the settlement of share trades with 30,920,113 votes in
favor (representing 95% of voting shares), 792,752 votes opposed
(representing 2% of voting shares) and 690,711 votes abstaining (2% of
voting shares).
The Shareholders did not approve an amendment to the Declaration of Trust
that would have authorized the issuance of preferred shares. This
amendment required the approval of 70% of outstanding shares, with
non-votes counting as votes against. The proposed amendment received
22,413,818 votes in favor (representing 91% of nonabstaining shares and
63% of outstanding shares), 2,250,684 votes against (9% of nonabstaining
shares and 6% of outstanding shares) and 527,560 votes abstaining (1% of
outstanding shares).
Item 5. Other Information
None
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) Articles of Amendment to Declaration of Trust dated
June 24, 1999--incorporated by reference to Exhibit 4c
to Amendment No. 1 to the Trust's Form S-3 registration
statement filed with the Securities and Exchange
Commission as of July 14, 1999.
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. May 3, 1999--Report pursuant to Item 5 on the release of the
Trust's March 31, 1999 earnings information
2. July 26, 1999--Report pursuant to Item 5 on the release of the
Trust's June 30, 1999 earnings information
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON REAL ESTATE INVESTMENT TRUST
s/Larry E. Finger/
------------------------------------------------
Larry E. Finger,
Senior Vice President
and Chief Financial Officer
s/Laura M. Franklin/
------------------------------------------------
Laura M. Franklin,
Vice President,
Chief Accounting Officer and
Corporate Secretary
Date: August 13, 1999
22
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