<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-2809
WESTERN INVESTMENT REAL ESTATE TRUST
------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-6100058
- ------------------------------------------ -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3450 CALIFORNIA STREET, SAN FRANCISCO, CA 94118
- ------------------------------------------ -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 929-0211
-------------------------
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares of Beneficial Interest, No Par Value - 17,138,432 shares as of March
31, 1997
1
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
INDEX TO 10-Q
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (unaudited)
Balance Sheets - March 31, 1997 and December 31, 1996 3
Statements of Income - Three months ended March 31, 1997
and 1996 4
Statements of Shareholders' Equity - Three months
ended March 31, 1997 and year ended December 31, 1996 5
Statements of Cash Flows - Three months ended
March 31, 1997 and 1996 6
Notes to Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 12
PART II. OTHER INFORMATION 13
SIGNATURE 14
2
<PAGE>
BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, December 31,
ASSETS 1997 1996
-------------------------
(In thousands)
<S> <C> <C>
Real estate investments:
Real estate properties............................. $385,336 $384,550
Less accumulated depreciation and amortization..... (68,893) (66,271)
-------- --------
316,443 318,279
Real estate properties held for sale,
(net of accumulated depreciation of $5,525,000).. 10,615 10,636
-------- --------
Net real estate investments...................... 327,058 328,915
Cash and cash equivalents............................. 976 952
Accounts receivable and other assets.................. 7,307 7,551
Deferred long-term debt issuance costs, net........... 2,157 2,211
-------- --------
$337,498 $339,629
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank line of credit................................... $ 32,700 $ 32,250
Convertible debentures................................ 61,310 61,310
Senior notes, net..................................... 49,900 49,897
-------- --------
143,910 143,457
Interest payable...................................... 492 1,477
Prepaid rents and security deposits................... 1,826 1,554
Other liabilities..................................... 1,332 1,193
-------- --------
Total liabilities.................................. 147,560 147,681
Shareholders' equity:
Shares of beneficial interest, no par value,
unlimited share authorization.
Issued and outstanding:
March 31, 1997 - 17,138,432;
December 31, 1996 - 17,138,432 shares........... 242,054 242,054
Accumulated dividends in excess of net income...... (52,116) (50,106)
-------- --------
Commitments and contingencies (Note C)
Total shareholders' equity......................... 189,938 191,948
-------- --------
$337,498 $339,629
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1997 1996
-------------------------------
(In thousands,
except for per share and share data)
REVENUES:
Minimum rents................................ $ 9,370 $ 9,539
Percentage rents............................. 167 154
Recoveries from tenants...................... 1,324 1,283
Other income................................. 105 195
---------- ----------
Total revenues................................. 10,966 11,171
---------- ----------
---------- ----------
EXPENSES:
Interest..................................... 2,816 2,843
Property operating costs..................... 1,595 1,594
Depreciation and amortization................ 2,727 2,747
Other operating expenses..................... 557 693
General and administrative................... 482 478
---------- ----------
Total expenses................................. 8,177 8,355
---------- ----------
Net income................................... $ 2,789 $ 2,816
---------- ----------
Per share data:
Net income................................... $ 0.163 $ 0.166
---------- ----------
Cash dividends paid.......................... $ 0.28 $ 0.28
---------- ----------
Weighted average number of shares outstanding.. 17,138,432 16,972,496
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST
- --------------------------------------------------------------------------------
Three Months Ended March 31, 1997
and Year Ended December 31, 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Dividends Total
Shares of in Excess of Share-
Beneficial Interest Net holders'
-------------------
Number Amount Income Equity
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 16,972,496 $240,034 $ (43,235) $196,799
Debenture redemption............. 165,936 2,020 -- 2,020
Net income....................... -- -- 12,231 12,231
Cash dividends paid.............. -- -- (19,102) (19,102)
---------- -------- ---------- --------
Balance, December 31, 1996.......17,138,432 242,054 (50,106) 191,948
Net income....................... -- -- 2,789 2,789
Cash dividends paid.............. -- -- (4,799) (4,799)
---------- -------- ---------- --------
BALANCE, MARCH 31, 1997..........17,138,432 $242,054 $ (52,116) $189,938
---------- -------- ---------- --------
---------- -------- ---------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
STATEMENTS OF CASH FLOWS WESTERN INVESTMENT REAL ESTATE TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended,
March 31,
---------
1997 1996
------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 2,789 $ 2,816
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................ 2,727 2,747
Amortization of deferred debt issuance costs................. 87 97
Decrease in accounts receivable and other assets............. 264 603
Increase in deferred rent receivable......................... (29) (155)
(Decrease) increase in interest payable...................... (985) 289
Increase in prepaid rents,
security deposits and other liabilities.................... 411 97
------- -------
Net cash provided by operating activities.................... 5,264 6,494
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Acquisition costs) recovery of acquisition costs
of real estate investments................................... (283) 26
Improvements of real estate investments:
Build-to-suit developments................................... (193) (1,494)
New leases................................................... (478) (380)
General...................................................... (11) (2)
Recovery of investment in direct financing leases............... 74 64
------- -------
Net cash used in investing activities........................ (891) (1,786)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank line of credit................................. 7,900 9,000
Principal payments on bank line of credit....................... (7,450) (8,825)
Principal payments on real estate loan payable.................. -- (18)
Redemption of convertible debentures............................ -- (40)
Cash dividends paid............................................. (4,799) (4,752)
------- -------
Net cash used in financing activities........................ (4,349) (4,635)
------- -------
Net increase in cash and cash equivalents.................... 24 73
------- -------
Cash and cash equivalents, at beginning of period................ $ 952 $ 657
------- -------
Cash and cash equivalents, at end of period...................... $ 976 $ 730
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest....................... $ 3,716 $ 2,490
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
Notes to Financial Statements
March 31, 1997
(Unaudited)
Note A: BASIS OF PRESENTATION
The financial statements included in this report have been prepared pursuant to
the rules of the Securities and Exchange Commission. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules. Interim results are not necessarily indicative
of results for a full year.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and notes thereto included in the Trust's latest
annual report on Form 10-K. When necessary, reclassifications have been made to
prior period balances to conform to current period presentation.
The Trust will adopt Financial Accounting Standards Board Statement (FAS)
128: "Earnings per Share" after December 15, 1997. For the three months
ended March 31, 1997 and 1996, the affect of applying that statement are not
material.
Note B: REAL ESTATE INVESTMENTS
During March, 1997, the Trust acquired an undeveloped pad adjacent to its
Yreka Shopping Center for $280,000. The acquisition effectively removed use
restrictions on in-line tenants and a developable pad within the Trust's
shopping center. Concurrent with this acquisition, the Trust entered into a
15-year lease with Carl's Jr., a national fast food retailer, and has
commenced the development process of building 2,500 leasable square feet on
the developable pad previously owned by the Trust, pursuant to this lease.
At March 31, 1997, the Trust owned 60 properties, totaling 4.8 million leasable
square feet. Included in this total are ten properties which are being held for
sale and total 290,000 leasable square feet.
In April, 1997, the Trust sold the Boulder Creek, California, property for
$175,000 and the Santa Maria, California, property (leased to Lucky Stores) for
$1.3 million. The Trust plans on using the combined sales proceeds to purchase
real estate pursuant to a tax-deferred exchange.
7
<PAGE>
During March, 1997, the Trust entered into an agreement to purchase a 70,483
leasable square foot shopping center located in Northern California for $4.75
million. The Trust anticipates completing this purchase during the second
quarter of 1997, using the proceeds from the recent sales of properties as well
as an advance on the line of credit.
Occupancy percentages for the Trust's portfolio are as follows:
March 31, 1997 December 31, 1996 March 31, 1996
-------------- ----------------- --------------
Retail 94.1% 93.9% 93.9%
Commercial 74.9% 86.0% 100.0%
Industrial 100.0% 100.0% 100.0%
Overall Occupancy 93.5% 93.7% 94.2%
Note C: CAPITAL EXPENDITURES
It is the Trust's practice to capitalize certain costs which exceed $4,000 and
are associated with improvement and rental of real estate investments.
Capitalized costs include leasing-related costs and property improvements.
Capital expenditures for the three months ended March 31, 1997 and 1996 are as
follows:
Quarter Ended
March 31,
---------
1997 1996
--------------------
(In thousands)
"Build to Suit" capital improvements................. $193 $1,494
Capitalized costs incurred in connection with
leasing previously UNLEASED space................ 97 44
Capitalized costs incurred in connection with
leasing previously LEASED space.................. 381 336
Capitalized costs which relate to
improvements to common areas..................... 11 2
---- ------
Total Capitalized expenditures........................ $682 $1,876
---- ------
---- ------
Improvements.......................................... $557 $1,813
Leasing-related costs................................. 125 63
---- ------
Total Capitalized expenditures........................ $682 $1,876
---- ------
---- ------
8
<PAGE>
During the three months ended March 31, 1997, the Trust entered into leases that
obligate the Trust to fund leasing-related costs and property improvements.
This obligation relates to new leases and lease renewals in the shopping center
and retail portfolio, a portion of which was funded during the quarter ended
March 31, 1997 and is reflected in the preceding table. In addition, a portion
remains an obligation of the Trust at March 31, 1997.
The aggregate and per-square-foot information representing all the leases the
Trust executed during the quarter is as follows:
<TABLE>
<CAPTION>
New Leases
----------
Tenant Leasing
Property Type Build to Suit Improvements Commissions
------------- ----------------------- ------------------ -----------------
Per Per Per
Aggregate Square Aggregate Square Aggregate Square
Amount Foot Amount Foot Amount Foot
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Shopping Centers &
Retail Properties $250,000 $100.00 $751,634 $26.68 $100,766 $2.76
- --------------------------------------------------------------------------------
Lease Renewals
--------------
Tenant Leasing
Property Type Improvements Commissions
------------- ----------------------- ------------------
<S> <C> <C> <C> <C>
Per Per
Aggregate Square Aggregate Square
Amount Foot Amount Foot
--------- ------ --------- ------
Shopping Centers &
Retail Properties $6,000 $5.00 $26,682 $1.16
- --------------------------------------------------------------------------------
</TABLE>
Note D: DIVIDEND REINVESTMENT PLAN
In accordance with the Trust's Dividend Reinvestment Plan, $191,000 and $185,000
in dividend reinvestment and shareholders' additional cash payments were used to
purchase shares in the open market for the participating shareholders during the
quarter ended March 31, 1997 and 1996, respectively.
9
<PAGE>
Note E: FUNDS FROM OPERATIONS
The Trust considers Funds From Operations to be an alternate measure of an
equity REIT's performance since such measure does not recognize depreciation and
amortization of real estate assets as reductions of cash flow from operations.
Historical cost accounting for real estate assets implicitly assumes that the
value of real estate assets diminishes predictably over time. Yet, since real
estate values have historically risen or fallen with market conditions, the
Trust, along with most industry investors, has considered presentation of
operating results for real estate companies that use historical cost accounting
to be less than fully informative.
The National Association of Real Estate Investment Trusts (NAREIT) defines Funds
From Operations as net income plus depreciation and amortization of assets
uniquely significant to the real estate industry, reduced by gains and increased
by losses on sales of property. Funds From Operations does not represent cash
flows from operations as defined by generally accepted accounting principles and
should not be considered a substitute for net income as an indicator of the
Trust's operating performance, or for cash flows as a measure of liquidity.
Funds From Operations, calculated in accordance with NAREIT's 1995 guidelines,
for the three months ended March 31, 1997 and 1996, respectively, is as follows:
Quarter Ended March 31,
-----------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Net Income $2,789 $2,816
Plus: Real property depreciation 2,445 2,469
Amortization of tenant improvement costs 177 172
Amortization of leasing related costs 77 79
------ ------
Funds From Operations $5,488 $5,536
------ ------
------ ------
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such "forward-looking" statements are subject to known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of the Trust to be materially different from any
future results, performance, or achievements expressed or implied by such
"forward-looking" statements.
LIQUIDITY AND CAPITAL RESOURCES
The Trust anticipates that cash flows provided by operations and other sources
available to the Trust will continue to provide adequate funds for all current
principal and interest payments as well as dividend payments in accordance with
REIT qualification requirements. Cash on hand, borrowings under the existing
bank line of credit, as well as other debt and equity alternatives, will provide
the necessary funds to achieve future growth.
The Trust's indenture executed in connection with the Trust's senior notes and
bank line of credit contain certain covenants (including minimum shareholders'
equity, maximum ratio of debt to net worth and income coverage requirements)
which impose certain limitations on the incurrence of debt and other
restrictions.
As of March 31, 1997, the Trust had approximately $12.3 million available under
its $45 million bank line of credit. This facility can be used to fund
acquisitions and other cash requirements. The interest rate under the facility
is either LIBOR plus 1.6% or the participating banks' reference rate, at the
Trust's election. The bank line of credit expires May 31, 1998, at which time
the Trust intends to replace or renew it. The weighted average interest rate on
March 31, 1997 and 1996 was 7.4% and 7.2%, respectively.
During March, 1997, the Trust entered into an agreement to purchase a 70,483
leasable square foot shopping center located in Northern California for $4.75
million. The Trust anticipates completing this purchase during the second
quarter of 1997, using proceeds from the recent sales of properties as well as
an advance on the line of credit.
As of March 31, 1997, the Trust had commitments under several new leases
which result in approximately $2.5 million in future real estate
improvements and leasing commissions. In addition, the Trust has initiated a
roof structure repair program on a shopping center. It is estimated that the
repair program will require up to $550,000. These expenditures will be paid
from operating cash flows and borrowings under the line of credit.
11
<PAGE>
FUNDS FROM OPERATIONS
As noted in Footnote E of the NOTES TO FINANCIAL STATEMENTS, the Trust considers
Funds From Operations to be an alternate measure of the performance of an equity
REIT.
Funds From Operations (1995 NAREIT definition) decreased $48,000, or 1%, to
$5,488,000 for the three months ended March 31, 1997, from $5,536,000 for the
comparable period in 1996. The major components of this decrease are decreased
minimum rents and other income partially offset by decreased other operating
expenses.
RESULTS OF OPERATIONS
COMPARISON OF QUARTER ENDED MARCH 31, 1997 AND 1996
Net income for the three months ended March 31, 1997 was $2,789,000, down 1%
from $2,816,000 for the comparable period in 1996. On a per share basis, net
income decreased from $0.17 per share in 1996 to $0.16 per share in 1997. The
major components of this decrease were decreased minimum rents and other income
partially offset by decreased other operating expenses.
Minimum rents decreased $169,000 to $9,370,000 for the quarter ended March 31,
1997 from $9,539,000 for the comparable quarter in 1996. This decrease
primarily reflects the vacancy of the Trust's commercial property located in
Petaluma, California. This 42,136 leasable square foot property was previously
leased to Fireman's Fund. A lease for 22,086 square feet expired in July, 1996,
and the remaining 20,050 square foot lease expired in January, 1997.
Other income declined from $195,000 for the quarter ended March 31, 1996 to
$105,000 for the comparable quarter in 1997. This $90,000 decline is primarily
due to the reduction of lease termination fees recognized in 1996.
Other operating expense for the quarter ended March 31, 1997 was $557,000, or
$136,000 less than the 1996 comparable quarter amount of $693,000. The most
significant factor in the 1997 first quarter's decrease over 1996 is a decrease
in leasing and property management costs.
12
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5. None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
(3) Declaration of Trust, as amended (filed as Exhibit 3.1 to
Registration Statement on Form S-3 No. 33-22893 and incorporated
herein by reference).
(4.1) Form of Indenture relating to the 8% Convertible Debentures
(filed as Exhibit 4.1 to Registration Statement on Form S-3
No. 33-22893 and incorporated herein by reference).
(4.2) Form of Indenture relating to the Senior Notes (filed as
Exhibit 4.1 to Registration Statement on Form S-3 No.
33-71270 and incorporated herein by reference).
(4.3) Form of Senior Notes (filed as Exhibit 4.2 to Registration
Statement on Form S-3 No. 33-71270 and incorporated herein by
reference).
(10.1)* Trust's Nonqualified Stock Option Plan (filed as Exhibit
4.2 to Registration Statement on Form S-8 No. 33-27016 and
incorporated herein by reference).
(10.2)* Trust's Trustee Emeritus Plan (filed as an Exhibit to
Proxy Statement dated March 25, 1986 and incorporated herein by
reference).
(b) Reports on Form 8-K.
None.
* Management contract or compensatory plan or arrangement.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN INVESTMENT REAL ESTATE TRUST
------------------------------------
(Registrant)
By: s/Dennis D. Ryan
----------------------------
Dennis D. Ryan
Executive Vice President,
Chief Financial Officer
and Trustee
Dated: May 5, 1997
----------------
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
BALANCE SHEET AT MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 976
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 385336
<DEPRECIATION> 68893
<TOTAL-ASSETS> 337498
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 143910
242054
0
<COMMON> 0
<OTHER-SE> (52116)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 337498
<SALES> 0
<TOTAL-REVENUES> 10966
<CGS> 0
<TOTAL-COSTS> 2152<F4>
<OTHER-EXPENSES> 3209<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2816
<INCOME-PRETAX> 2789
<INCOME-TAX> 0
<INCOME-CONTINUING> 2789
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2789
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16<F6>
<FN>
<F1>AMOUNT INSIGNIFICANT.
<F2>BALANCE SHEET IS NOT CLASSIFIED.
<F3>AMOUNT REPRESENTS ACCUMULATED DIVIDENDS IN EXCESS OF NET INCOME.
<F4>AMOUNT COMPRISED OF PROPERTY OPERATING COSTS ($1,595) AND OTHER OPERATING
EXPENSES ($557).
<F5>AMOUNT COMPRISED OF DEPRECIATION EXPENSE ($2,727) AND GENERAL AND
ADMINISTRATIVE EXPENSE ($482).
<F6>EXERCISE OF THE OUTSTANDING STOCK OPTIONS WOULD NOT HAVE MATERIAL EFFECT ON
EARNINGS PER SHARE.
</FN>
</TABLE>
