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 MARCH 31, 1999 COMMISSION FILE NO. 1-6622
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 53-0261100
------------------------------------------ -----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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
INDEX
Page
Part I: Financial Information ----
----------------------
Item l. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statement of Changes in Shareholders' Equity 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 12
Part II: Other Information
-----------------
Item l. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</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 Form 10-K
Report filed with the Securities and Exchange Commission.
2
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PART 1
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share amounts)
(Unaudited)
March 31, December 31,
1999 1998
------------------ -------------------
<S> <C> <C>
Assets
Real estate at cost $593,801 $598,874
Accumulated depreciation (69,106) (68,301)
------------------ -------------------
Total investment in real estate 524,695 530,573
Cash and temporary investments 23,773 4,595
Rents and other receivables, net of allowance for doubtful
accounts of $867 and $821, respectively 4,076 4,130
Prepaid expenses and other assets 17,759 19,409
------------------ -------------------
$570,303 $558,707
================== ===================
Liabilities
Accounts payable and other liabilities $9,030 $13,524
Tenant security deposits 4,368 4,331
Advance rents 2,231 2,680
Mortgage notes payable 28,779 28,912
Lines of credit payable 54,000 44,000
Notes payable 210,000 210,000
------------------ -------------------
308,408 303,447
------------------ -------------------
Minority interest 1,530 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 March
31, 1999 and December 31, 1998, respectively 357 357
Additional paid-in capital 260,008 253,376
------------------ -------------------
260,365 253,733
------------------ -------------------
$570,303 $558,707
================== ===================
</TABLE>
See accompanying notes to financial statements
3
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<TABLE>
<CAPTION>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Real estate rental revenue $27,654 $24,501
Real estate expenses (8,423) (7,149)
-------------- --------------
19,231 17,352
Depreciation and amortization (4,451) (3,641)
-------------- --------------
Operating Income 14,780 13,711
Other income 204 230
Interest expense (5,220) (3,778)
General and administrative (1,315) (1,527)
-------------- --------------
Income before gain on sale of real estate 8,449 8,636
-------------- --------------
Gain on sale of real estate 7,909 5,863
-------------- --------------
Net Income $16,358 $14,499
============== ==============
Per share information based on the
weighted average number
of shares outstanding
Shares-- Basic 35,708 35,684
Shares-- Diluted 35,727 35,707
Net income per share-- Basic $0.46 $0.41
============== ==============
Net income per share-- Diluted $0.46 $0.41
============== ==============
Dividends paid $0.28 $0.27
============== ==============
</TABLE>
See accompanying notes to financial statements
4
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<CAPTION>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended March 31,
1999 1998
------------- --------------
<S> <C> <C>
Cash Flow From Operating Activities
Net income $16,358 $14,499
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (7,909) (5,863)
Depreciation and amortization 4,451 3,641
Changes in other assets 1,312 (177)
Changes in other liabilities (4,728) 425
------------- --------------
Net cash provided by operating activities 9,484 12,525
------------- --------------
Cash Flow From Investing Activities
Capital improvements to real estate (5,358) (3,170)
Non-real estate capital improvements (39) (206)
Real estate acquisitions (6,909) -
Cash received for sale of real estate 22,033 7,589
------------- --------------
Net cash provided by investing activities 9,727 4,213
------------- --------------
Cash Flow From Financing Activities
Dividends paid (9,999) (9,635)
Net proceeds from debt offering - 102,797
Borrowings - Lines of credit 10,000 -
Repayments - Lines of credit - (95,250)
Principal payments - Mortgage note payable (134) (23)
Share options exercised 100 -
------------- --------------
Net cash used in financing activities (33) (2,111)
------------- --------------
Net increase in cash and temporary investments 19,178 14,627
Cash and temporary investments at beginning of year 4,595 7,908
------------- --------------
Cash and temporary investments at end of period $23,773 $22,535
============= ==============
Supplemental disclosure of cash flow information:
Cash paid during the first three months for interest $8,512 $4,685
============= ==============
</TABLE>
See accompanying notes to financial statements
5
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<TABLE>
<CAPTION>
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
(In Thousands)
Additional Shareholders'
Shares Par Value Paid in Capital Equity
-------------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 35,692 $357 $253,376 $253,733
Net income 16,358 16,358
Dividends (9,999) (9,999)
Share Options Exercised 18 0 273 273
-------------------- ----------------- ----------------- --------------
Balance, March 31, 1999 35,710 $357 $260,008 $260,365
==================== ================= ================= ==============
</TABLE>
See accompanying notes to financial statements
6
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 Mid-Atlantic Region.
WRIT operates in a manner intended to enable it to qualify as a real estate
investment trust under the Internal Revenue Code (the "Code"). In accordance
with the Code, a trust which distributes its capital gains and at least 95% of
its taxable income to its shareholders each year, and which meets certain other
conditions, will not be taxed on that portion of its taxable income which is
distributed to its shareholders. Accordingly, no provision for Federal income
taxes is required.
NOTE 2: ACCOUNTING POLICIES
- ---------------------------
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
WRIT believes that the disclosures made are adequate to make the information
presented not misleading.
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 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
7
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999(Unaudited)
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 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 in the three months ended March 31, 1999.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments includes cash equivalents with original
maturities of 90 days or less.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities
8
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999(Unaudited)
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the report-
ing period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 3: REAL ESTATE INVESTMENTS
- -------------------------------
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C., Virginia and Delaware as follows:
March 31, 1999
(In Thousands)
--------------
Office buildings $312,123
Industrial distribution centers 101,901
Apartment buildings 83,806
Shopping centers 95.971
--------
$593,801
========
WRIT acquired the following property during the first three months of 1999 as
follows:
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<CAPTION>
<S> <C> <C> <C> <C> <C>
Acquisition Date Property Property Rentable Square Acquisition
Name Type Feet Cost (in
thousands)
- --------------------- ------------------------------ --------------- ----------------- -----------------
January 27, 1999 Dulles South IV Industrial 83,000 $6,909
</TABLE>
NOTE 4: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of March 31, 1999, WRIT had two unsecured credit commitments in the amount of
$50 million and $25 million. $54 million was outstanding under the credit
commitments as of March 31, 1999. 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 three months ended
March 31, 1999 bore interest at rates ranging from 5.67% 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, and all unpaid principal and interest are due
January 31, 2000.
The credit commitments require WRIT to pay the lenders unused commitment fees at
the rate of 0.175% per annum on the amount by which the unused portion of the
commitment exceeds the balance of outstanding advances and term loans. These
fees are payable quarterly. At March 31, 1999, $21 million was available under
the credit commitments. The credit commitments also contain certain financial
covenants related to debt, net worth, and cash flow, and non-financial covenants
which WRIT has met as of March 31, 1999.
9
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999(Unaudited)
NOTE 5: NOTES PAYABLE
- ---------------------
On August 13, 1996 WRIT sold $50 million of 7.125% 7-year unsecured notes due
August 13, 2003, and $50 million of 7.25% unsecured 10-year notes due August 13,
2006. The 7-year notes were sold at 99.107% of par and the 10-year notes were
sold at 98.166% of par. Net proceeds to the Trust after deducting underwriting
expenses were $97.6 million. The 7-year notes bear an effective interest rate of
7.46%, and the 10 year notes bear an effective interest rate of 7.49%, for a
combined effective interest rate of 7.47%. WRIT used the proceeds of these notes
to pay down its lines of credit and to finance acquisitions and capital
improvements to its properties.
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 March 31, 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 $7.5 million of the proceeds from
these sales to purchase Sully Square industrial property (see Note 7), and
intends to use the remaining proceeds to invest in other real estate.
On March 23, 1998, WRIT sold the Shirley-395 Business Center. The property was
sold for approximately $7.6 million in cash resulting in a gain of approximately
$5.9 million in cash. On May 7, 1998, WRIT sold the 5410 Port Royal Business
Center. The property was sold for approximately $1.7 million in cash resulting
in a $64,000 gain. WRIT used the proceeds from the sales to invest in other real
estate.
NOTE 7: SUBSEQUENT EVENT
- ------------------------
On April 16, 1999, WRIT purchased Sully Square industrial property for a
purchase price of $7.5 million. The property consists of three flex/ warehouse
buildings containing 95,000 square feet and is 100% leased. The property was
purchased using a portion of the proceeds from the property sales discussed in
Note 6.
NOTE 8: SEGMENT INFORMATION
- ----------------------------
WRIT has four reportable segments: Office Buildings, Industrial Distribution
Centers, Apartment Buildings and Shopping Centers. Office Buildings represent
50% of real estate rental revenue and provide office space for various types of
businesses. Industrial Distribution Centers represent 14% of real estate rental
revenue and are used for warehousing and distribution. Apartment Buildings
represent 20% of real estate rental revenue. These properties
10
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WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999(Unaudited)
provide housing for families throughout the Washington Metropolitan area.
Shopping Centers represent the remaining 16% of real estate rental revenue and
are retail outlets for a variety of stores.
The accounting policies of the segments are the same as those described in Note
2. WRIT evaluates performance based upon operating income from the combined
properties in each segment. WRIT's reportable segments are consolidations of
similar properties. They are managed separately because each segment requires
different operating, pricing and leasing strategies. All of these properties
have been acquired separately and are incorporated into the applicable segment.
<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
------------ ------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Real estate rental revenue $14,002 $3,829 $5,397 $4,426 $- $27,654
Real estate expenses 4,492 870 2,045 1,016 - 8,423
------------ ------------- ------------ ------------ ----------- -------------
Operating income 9,510 2,959 3,352 3,410 - 19,231
Depreciation and 2,520 745 652 534 - 4,451
amortization
------------ ------------- ------------ ------------ ----------- -------------
Income from real estate 6,990 2,214 2,700 2,876 - 14,780
Other income - - - - 204 204
Interest expense (414) - - (164) (4,642) (5,220)
General and administrative - - - - (1,315) (1,315)
============ ============= ============ ============ =========== =============
Net income before gain on
sale of real estate $6,576 $2,214 $2,700 $2,712 $(5,753) $8,449
============ ============= ============ ============ =========== =============
Capital investments $9,796 $802 $637 $1,032 $39 $12,306
============ ============= ============ ============ =========== =============
Total assets $287,596 $95,545 $65,571 $84,610 $36,981 $570,303
============ ============= ============ ============ =========== =============
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
------------ ------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Real estate rental revenue $12,364 $2,860 $5,159 $4,118 $- $24,501
Real estate expenses 3,905 557 1,896 791 - 7,149
------------ ------------- ------------ ------------ ----------- -------------
Operating income 8,459 2,303 3,263 3,327 - 17,352
Depreciation and 2,049 459 637 496 - 3,641
amortization
------------ ------------- ------------ ------------ ----------- -------------
Income from real estate 6,410 1,844 2,626 2,831 - 13,711
Other income - - - - 230 230
Interest expense - - - (167) (3,611) (3,778)
General and administrative - - - - (1,527) (1,527)
============ ============= ============ ============ =========== =============
Net income $6,410 $1,844 $2,626 $2,664 $(4,908) $8,636
============ ============= ============ ============ =========== =============
Capital investments $1,996 $317 $303 $554 $206 $3,376
============ ============= ============ ============ =========== =============
</TABLE>
11
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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: Three Months Ended March 31, 1999 Compared to the
Three Months Ended March 31, 1998
Total revenues for the first quarter of 1999 increased 12.9% ($3.2 million) to
$27.7 million from $24.5 million in the first quarter of 1998.
For the first quarter of 1999, WRIT's office buildings had increases of 13.2% in
revenues and 9.0% in operating income, over the first quarter of 1998. These
increases were primarily due to the acquisition of 8230 Boone Boulevard in
September 1998 and Woodburn Medical Park in November 1998 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 first quarters of 1998 and 1999, revenue and
operating income increased 5.7% and 2.5% respectively. The increases in revenues
and operating income were due to increases in rental rates and occupancy across
the sector.
For the first quarter of 1999, WRIT's industrial distribution center revenues
and operating income increased 33.8% and 20.0% respectively, over the first
quarter of 1998. This was primarily due to the acquisitions of Northern Virginia
Industrial Park in May 1998, 8900 Telegraph Road in September 1998 and Dulles
South IV in January 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 first quarters of 1998 and 1999, revenue increased
by 8.1% and net operating income was unchanged. The increase in revenues was
primarily due to increased rental rates and increased tenant pass through
expense recoveries. Operating income was unchanged due to offsetting increases
in operating expenses relating to the milder weather in 1998 as discussed below.
For the first quarter of 1999, WRIT's apartment revenues and operating income
increased 4.6% and 2.8% respectively over the first quarter of 1998. These
increases were primarily due to increased rental and occupancy rates offset in
part by increased operating expenses caused by the milder weather conditions in
1998 as discussed below. WRIT did not purchase any apartment properties in 1998
or 1999.
For the first quarter of 1999, WRIT's shopping center revenues increased 7.5%
and operating income was
12
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
unchanged over the first quarter of 1998. This revenue increase was 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. Operating income was unchanged due to offsetting increases
in operating expenses relating to the milder weather in 1998 as discussed below.
Comparing those shopping centers owned by WRIT for the entire first quarters of
1998 and 1999, revenue and operating income increased by 4.1% and 4.4%
respectively. These increases were primarily due to increased rental rates and
increased tenant pass through expense recoveries.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended March 31,
1999 Compared to the Three Months Ended March 31, 1998
Real estate expenses increased $1.3 million or 17.8% to $8.4 million as compared
to $7.1 million for the first quarter of 1998. This increase is primarily due to
expenses relating to properties acquired in 1998 and 1999, 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 1998.
Depreciation and amortization expense increased $0.8 million or 22.2% to $4.5
million as compared to $3.6 million for the first quarter of 1998. This is
primarily due to 1998 and year to date 1999 acquisitions of $45.4 million and
$6.9 million, respectively, and 1998 and year to date 1999 capital and tenant
improvement expenditures which totaled $11.8 million and $5.4 million,
respectively.
Total interest expense was $5.2 million for the first quarter of 1999 as
compared to $3.8 million for the first quarter of 1998. This increase is
primarily attributable to the issuance of $110 million in debt securities in
February 1998 and the assumption of $21.6 million in mortgages in November 1998
in connection with the acquisition of Woodburn Medical Park. For the first
quarter of 1999, notes payable interest expense was $3.9 million, lines of
credit interest expense was $0.7 million and mortgage interest expense was $0.6
million. For the first quarter of 1998, notes payable interest expense was $2.6
million, lines of credit interest expense was $1.0 million and mortgage interest
expense was $0.2 million.
General and administrative expenses decreased $0.2 million to $1.3 million as
compared to $1.5 million for the first quarter of 1998. The decrease is
primarily attributable to decreased incentive compensation. For the first
quarter of 1999, general and administrative expenses as a percentage of revenue
were 4.8% as compared to 6.2% for the first quarter of 1998.
Gain on sale of real estate for the three months ended March 31, 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 three months ended March 31, 1999 was $5.9 million,
resulting from the sale of Shirley 395 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
13
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
from its existing unsecured credit commitments and management believes that
additional sources of capital are available from the sale of additional shares
and/or the sale of medium or long-term notes. The funds raised would be used to
pay off any outstanding advances on the Trust's lines of credit and for new
acquisitions and capital improvements.
WRIT has line of credit commitments in place from commercial banks for up to $75
million which bear interest at an adjustable spread over LIBOR based on the
Trust's interest coverage ratio and public debt rating. As of March 31, 1999,
WRIT had $54 million outstanding under its lines of credit. WRIT acquired six
properties in 1998 and one property in 1999 (as of March 31) for total
acquisition costs of $82.2 million and $6.9 million, respectively. The 1998
acquisitions were primarily financed through line of credit advances, from the
February 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 acquisition was financed through line of credit advances. Subsequent to
March 31, 1999, an additional property was purchased for $7.5 million using a
portion of the proceeds from the sales of four properties in 1999 of $22.0
million. The remainder of these proceeds is expected to be used to purchase more
real estate properties.
Cash flow from operating activities totaled $9.3 million for the first three
months of 1999, as a result of net income before gain on sale of real estate of
$7.9 million, depreciation and amortization of $4.5 million, decreases in other
assets of $1.3 million and decreases in liabilities (other than mortgage note,
senior notes and lines of credit payable) of $4.9 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 provided by investing activities for the first three months of 1999 was
$9.7 million, including cash received for sale of real estate of $22.0 million
net of real estate acquisitions of $6.9 million and capital improvements to real
estate of $5.4 million.
Net cash provided by financing activities for the first three months of 1999 was
$0.1 million, including line of credit borrowings of $10.0 million, principal
repayments of $0.1 million on the mortgage notes payable and $10.0 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.
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
WRIT's interest rate risk has not changed significantly from its risk as
disclosed in its 1998 Form 10-K.
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 March 31, 1999, the inventory and priority assignment phases of each
section of the Project had been completed. As described below, WRIT management
is in the process of assessing the Year 2000 compliance of items determined to
be material. Material items are those that WRIT's management believes have a
risk involving the safety of individuals, damage to the environment or property
or financial loss. The testing phases of the Project are also currently being
performed by the Trust.
The Building Operations section consists of the testing of key systems at the
property locations, such as fire detection/ prevention, elevators, heating/
ventilation and air conditioning, telephone and utility services. The assessment
section is on schedule, and WRIT estimates that approximately 75% of the
activities relating to this section were completed as of March 31, 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 May 31, 1999. There
have not been any significant repairs or replacements related to this phase of
the project. Contingency planning for this section is underway. All Building
Operations activities are expected to be completed in the fourth quarter of
1999.
15
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Internal Operating Systems section includes the assessment of existing
hardware and software and, where applicable, the replacement of hardware/
software that is not Year 2000 compliant. The assessment phase is ongoing, and
WRIT believes that all of the significant hardware and software is Year 2000
compliant. Contingency planning for this section is expected to be completed by
the second quarter 1999. All Internal Operating Systems activities are expected
to be completed by the third quarter 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 was completed in the first quarter of
1999. These evaluations were followed by the development of contingency plans,
the documentation and testing of which is underway and 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 March 31, 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."
16
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. February 24, 1999--Report pursuant to Item 5 on the release of the
Trust's December 31, 1998 earnings information
2. May 3, 1999--Report pursuant to Item 5 on the release of the Trust's
March 31, 1999 earnings information
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON REAL ESTATE INVESTMENT TRUST
s/Larry E. Finger/
--------------------------------------------
Larry E. Finger,
Senior Vice President
and Chief Financial Officer
s/Laura M. Franklin/
--------------------------------------------
Laura M. Franklin,
Vice President,
Chief Accounting Officer and
Corporate Secretary
Date: May 11, 1999
18
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