<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 SEPTEMBER 30, 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 - 17,141,392 shares as of
September 30, 1997
1
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
INDEX TO 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 1997, and December 31, 1996 3
Statements of Income - Three and nine months ended September 30, 1997, and 1996 4
Statements of Shareholders' Equity - Nine months ended September 30, 1997,
and year ended December 31, 1996 5
Statements of Cash Flows - Nine months ended September 30, 1997, and 1996 6
Notes to Financial Statements 7 -12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16-17
Item 2. Changes in Securities 16-17
Item 3. Defaults upon Senior Securities 16-17
Item 4. Submission of Matters to a Vote of Security Holders 16-17
Item 5. Other Information 16-17
Item 6. Exhibits and Reports on Form 8-K 16-17
SIGNATURE 18
</TABLE>
2
<PAGE>
BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
--------------------------------
(In thousands, except share data)
<S> <C> <C>
Real estate investments:
Real estate properties. . . . . . . . . . . . . . . . . $388,372 $384,550
Less accumulated depreciation and amortization. . . . . (74,959) (66,271)
-------- --------
313,413 318,279
Real estate properties held for sale. . . . . . . . . . 7,598 16,161
Less accumulated depreciation and amortization. . . . . (2,230) (5,525)
-------- --------
5,368 10,636
-------- --------
Net real estate investments. . . . . . . . . . . . . 318,781 328,915
Cash and cash equivalents. . . . . . . . . . . . . . . . . 41,684 952
Accounts receivable and other assets . . . . . . . . . . . 16,128 7,551
Deferred long-term debt issuance costs, net. . . . . . . . 2,548 2,211
-------- --------
$379,141 $339,629
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank line of credit. . . . . . . . . . . . . . . . . . . . $ -- $ 32,250
Convertible debentures . . . . . . . . . . . . . . . . . . 60,500 61,310
Senior notes, net. . . . . . . . . . . . . . . . . . . . . 124,759 49,897
-------- --------
185,259 143,457
Interest payable . . . . . . . . . . . . . . . . . . . . . 582 1,477
Prepaid rents and security deposits. . . . . . . . . . . . 1,638 1,554
Other liabilities. . . . . . . . . . . . . . . . . . . . . 1,545 1,193
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . 189,024 147,681
Shareholders' equity:
Preferred Stock, 2,000,000 shares authorized;
No shares issued or outstanding. . . . . . . . . . . -- --
Shares of beneficial interest, no par value,
unlimited share authorization.
Issued and outstanding:
September 30, 1997 - 17,141,392
December 31, 1996 - 17,138,432 shares. . . . . . . . 242,090 242,054
Accumulated dividends in excess of net income . . . . . (51,973) (50,106)
-------- --------
Commitments and contingencies (Note C, D, E, F)
Total shareholders' equity. . . . . . . . . . . . . . . 190,117 191,948
-------- --------
$379,141 $339,629
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
--------------------------------------------------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C>
REVENUES:
Minimum rents. . . . . . . . . . . . . . . . . . $ 9,522 $ 9,471 $ 28,462 $ 28,607
Percentage rents . . . . . . . . . . . . . . . . 105 174 432 514
Recoveries from tenants. . . . . . . . . . . . . 1,438 1,873 4,916 5,185
Other income . . . . . . . . . . . . . . . . . . 251 209 563 618
---------- ---------- ---------- ----------
Total revenues. . . . . . . . . . . . . . . . . . . 11,316 11,727 34,373 34,924
---------- ---------- ---------- ----------
EXPENSES:
Interest . . . . . . . . . . . . . . . . . . . . 2,889 2,816 8,566 8,476
Property operating costs . . . . . . . . . . . . 1,731 2,203 5,922 6,242
Depreciation and amortization. . . . . . . . . . 2,755 2,914 8,255 8,481
Other operating expenses . . . . . . . . . . . . 600 716 1,702 2,055
General and administrative . . . . . . . . . . . 375 367 1,296 1,306
---------- ---------- ---------- ----------
Total expenses. . . . . . . . . . . . . . . . . . . 8,350 9,016 25,741 26,560
---------- ---------- ---------- ----------
Income from operations . . . . . . . . . . . . . 2,966 2,711 8,632 8,364
---------- ---------- ---------- ----------
Gains on sales of real estate investments . . . . . 2,737 83 3,897 1,115
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . $ 5,703 $ 2,794 $ 12,529 $ 9,479
---------- ---------- ---------- ----------
Per share data:
Income from operations . . . . . . . . . . . . . $ 0.173 $ 0.158 $ 0.504 $ 0.491
---------- ---------- ---------- ----------
Gains on sales of real estate
investments. . . . . . . . . . . . . . . . . . . $ 0.159 $ 0.005 $ 0.227 $ 0.065
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . $ 0.333 $ 0.163 $ 0.731 $ 0.557
---------- ---------- ---------- ----------
Cash dividends paid. . . . . . . . . . . . . . . $ 0.280 $ 0.280 $ 0.840 $ 0.840
---------- ---------- ---------- ----------
Weighted average number of shares outstanding . . . 17,139,075 17,136,774 17,138,649 17,027,649
---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------
Nine Months Ended September 30, 1997,
and Year Ended December 31, 1996
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Shares of Dividends Total
Beneficial Interest in Excess of Share-
------------------- 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 redemptions. . . . . . . . . . . . 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 proceeds from issuance of shares . . . . 2,960 36 -- 36
Net income . . . . . . . . . . . . . . . . . -- -- 12,529 12,529
Cash dividends paid. . . . . . . . . . . . . -- -- (14,396) (14,396)
---------- -------- ----------- -------
BALANCE, SEPTEMBER 30, 1997. . . . . . . . . 17,141,392 $242,090 $ (51,973) $190,117
---------- -------- ----------- -------
---------- -------- ----------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,529 $ 9,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 8,255 8,481
Amortization of deferred debt issuance costs . . . . . . . . 285 277
Gains on sales of real estate investments . . . . . . . . . (3,897) (1,115)
Gains on sale of marketable securities . . . . . . . . . . . -- (75)
Decrease in accounts receivable and other assets . . . . . . -- (168)
Increase in deferred rent receivable . . . . . . . . . . . . (299) (559)
Decrease in interest payable . . . . . . . . . . . . . . . . (895) (1,149)
Increase in prepaid rents and security deposits
and other liabilities . . . . . . . . . . . . . . . . . 414 806
------- -------
Net cash provided by operating activities . . . . . . . . . 16,392 15,977
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of real estate investments. . . . . . . . . . 8,954 1,371
Proceeds from sales of marketable securities . . . . . . . . . . -- 234
Investment in mortgage note receivable . . . . . . . . . . . . . (1,300) --
(Acquisition) recovery of acquisition costs of real
estate investments . . . . . . . . . . . . . . . . . . . . . . (283) 36
Funds escrowed pending acquisition . . . . . . . . . . . . . . . (7,306) --
Improvements of real estate investments:
Build-to-suit developments . . . . . . . . . . . . . . . . . (337) (3,605)
New leases . . . . . . . . . . . . . . . . . . . . . . . . . (2,283) (1,147)
General . . . . . . . . . . . . . . . . . . . . . . . . . . (245) (161)
Recovery of investment in direct financing leases . . . . . . . . 232 200
------- -------
Net cash used in investing activities . . . . . . . . . . . (2,568) (3,072)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances of bank line of credit . . . . . . . . . . . . . . . . . 23,500 32,468
Principal payments on bank line of credit . . . . . . . . . . . . (55,750) (29,468)
Principal payments on real estate loan payable . . . . . . . . . -- (1,294)
Redemption of convertible debentures . . . . . . . . . . . . . . (810) (40)
Net proceeds from issuance of shares. . . . . . . . . . . . . . . 36 --
Proceeds from senior notes offering . . . . . . . . . . . . . . . 74,851 --
Senior notes issuance costs . . . . . . . . . . . . . . . . . . . (523) --
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . (14,396) (14,303)
------- -------
Net cash provided by (used in) financing activities . . . . 26,908 (12,637)
------- -------
Net increase in cash and cash equivalents . . . . . . . . . 40,732 268
Cash and cash equivalents, at the beginning of the period . . . . . . $ 952 $ 657
------- -------
Cash and cash equivalents, at the end of the period . . . . . . . . . $ 41,684 $ 925
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest . . . . . . . . . . . . $ 9,178 $ 9,473
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
Notes to Financial Statements
September 30, 1997
(Unaudited)
Note A: THE COMPANY, BASIS OF PRESENTATION AND RECENT ACCOUNTING
PRONOUNCEMENTS
THE COMPANY
Western Investment Real Estate Trust, a self-administered and fully
integrated equity real estate investment trust (REIT), is a dominant owner of
neighborhood and community shopping centers in Northern California and
Northern Nevada. Western has continuously paid quarterly cash dividends to
its shareholders for 33 years. Its shares are listed on the American Stock
Exchange under the symbol WIR. The company was founded in 1962.
BASIS OF PRESENTATION
The financial statements included in this report have been prepared by the
Company, without audit, 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.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's latest
annual report on Form 10-K. When necessary, reclassifications have been made
to prior period balances to conform to current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER SHARE. The
Company will adopt SFAS 128 in the year-end 1997 financial statements, the
effective date of SFAS 128. In June 1997, FASB issued Financial Accounting
Standards No. 131 (SFAS 131), DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. The Company will adopt SFAS 131 in the year-end 1998
financial statements, the effective date of SFAS 131. For the three and nine
months ended September 30, 1997, and 1996, the effect of applying these
Statements would not have been material.
7
<PAGE>
Note B: REAL ESTATE INVESTMENTS
At September 30, 1997, the Company owned 54 properties, totaling 4.7 million
leasable square feet. Included in this total are five properties which were
held for sale and total 157,000 leasable square feet.
During the quarter ended September 30, 1997, the Company sold its Concord,
California, property for $1,700,000 and its Mountain View, California,
shopping center for $6,260,000. The Company recognized a gain of
approximately $648,000 on the sale of the Concord property and a gain of
approximately $2,089,000 on the sale of the Mountain View property.
As reported previously, in connection with the sale of the property located in
Concord, the Company received a 10-year $1,300,000 note secured by the Concord
property. The taxable gain from the sale of the Concord property will be
recognized pursuant to installment sale rules. The Company plans on using the
sales proceeds from the Mountain View property sale to purchase real estate
pursuant to a tax-deferred exchange.
Additionally, the decrease during the quarter in the real estate properties
held for sale portfolio is due to the above two sales as well as to a
decision by the Company to withdraw one property from the market. As such,
one property was reclassified and is no longer included in the real estate
property held for sale portfolio on the balance sheet.
Occupancy percentages for the Company's portfolio are as follows:
September 30, 1997 December 31, 1996 September 30, 1996
------------------ ----------------- ------------------
Retail 93.4% 93.9% 94.1%
Commercial 76.2% 86.0% 86.0%
Industrial 100.0% 100.0% 100.0%
Overall Occupancy 92.9% 93.7% 93.9%
Occupancy percentage is based on square footage leased as a percent of total
leasable square feet. Commercial and industrial leasable square footage
represents 4% and 2%, respectively, of the Company's total leasable square
footage.
Note C: CAPITAL EXPENDITURES
It is the Company's practice to capitalize certain costs which exceed $4,000 and
are associated with the improvement and rental of real estate investments.
Capitalized costs include leasing-related costs and property improvements.
Capital expenditures for the three and nine months ended September 30, 1997, and
1996 are as follows:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
------------------ -----------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
"Build to Suit" capital improvements . . . . . . . . . . . $ 125 $ 383 $ 337 $3,605
Capitalized costs incurred in connection with
leasing previously UNLEASED space. . . . . . . . . . . -0- 15 127 68
Capitalized costs incurred in connection with
leasing previously LEASED space. . . . . . . . . . . . 1,133 393 2,156 1,079
Capitalized costs which relate to
improvements to common areas . . . . . . . . . . . . . 162 90 245 161
------ ------ ------ ------
Total Capitalized expenditures . . . . . . . . . . . . . . $1,420 $ 881 $2,865 $4,913
------ ------ ------ ------
------ ------ ------ ------
Improvements . . . . . . . . . . . . . . . . . . . . . . . $1,222 $ 754 $2,398 $4,668
Leasing-related costs. . . . . . . . . . . . . . . . . . . 198 127 467 245
------ ------ ------ ------
Total Capitalized expenditures . . . . . . . . . . . . . . $1,420 $ 881 $2,865 $4,913
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
During the three months ended September 30, 1997, the Company entered into
leases that obligate the Company to fund certain leasing commissions and
property improvements. These obligations relate to both new leases and lease
renewals, a portion of which was paid and capitalized during the quarter ended
September 30, 1997, and is reflected in the preceding table.
The aggregate and per-square-foot information representing all the leases the
Company executed during the quarter is as follows:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITALIZED EXPENDITURES ASSOCIATED WITH NEW LEASES
Tenant Leasing
Property Type Improvenemts Commissions
- ------------- -------------------- ------------------
Per Per
Aggregate Square Aggregate Square
Amount Foot Amount Foot
------ ------ --------- ------
<S> <C> <C> <C> <C>
Shopping Centers &
Retail Properties $191,670 $5.90 $42,067 $1.47
Industrial Properties -- -- 32,148 1.58
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
CAPITALIZED EXPENDITURES ASSOCIATED WITH NEW LEASES
Tenant Leasing
Property Type Improvenemts Commissions
- ------------- -------------------- ------------------
Per Per
Aggregate Square Aggregate Square
Amount Foot Amount Foot
------ ------ --------- ------
<S> <C> <C> <C>
Shopping Centers &
Retail Properties $29,120 $4.70 $10,083 $0.63
</TABLE>
- -----------------------------------------------------------------------------
Note D: BANK LINE OF CREDIT
The outstanding balance under the bank line of credit was paid off using a
portion of the proceeds from the September 1997 sale of Senior Notes. As of
September 30, 1997, the Company had $45 million available under its $45
million bank line of credit. On October 27, 1997, the $60.5 million
Convertible Debentures were redeemed using cash and cash equivalents as well
as an advance on the line of credit.
During August 1997, the Company successfully negotiated a reduction of the
interest rate on its unsecured line of credit. The $45 million credit
facility now provides for an interest rate calculated at LIBOR plus 1.22%,
which represents a reduction of 38 basis points from the previous rate of
LIBOR plus 1.60%. Additionally, the term of the credit facility has been
amended to expire in three years, on June 30, 2000.
Note E: SENIOR NOTES
On September 25, 1997, the Company completed the sale of $75 million of
Senior Notes, comprising $25 million of 7.10% Notes due 2006, $25 million of
7.20% Notes due 2008, and $25 million of 7.30% Notes due 2010. The Notes
were issued under the Company's $150 million shelf registration. The
outstanding balance under the bank line of credit was paid off using a
portion of the proceeds from the September 1997 sale of Senior Notes. On
October 27, 1997 the $60.5 million Convertible Debentures were redeemed using
cash and cash equivalents as well as an advance of the line of credit.
The Senior Notes outstanding at September 30, 1997 are as follows:
Net Amount Coupon Interest Rate Due Date
---------- -------------------- ------------------
$49,908 7.875% February 15, 2004
24,965 7.100% September 15, 2006
24,941 7.200% September 15, 2008
$24,945 7.300% September 15, 2010
--------
$124,759
--------
10
<PAGE>
Note F: CONVERTIBLE DEBENTURES
On October 27, 1997, following a 30-day notification period, the Company's 8%
Convertible Debentures, with a $60.5 million principal balance, were redeemed
using cash and cash equivalents as well as an advance on the line of credit.
The Company will recognize an extraordinary loss of approximately $1.6
million from the extinguishment of the convertible debentures as a result of
the write-off of the related deferred long-term debt issuance costs.
Note G: FUNDS FROM OPERATIONS
The Company 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
Company, 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
Company'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 and nine months ended September 30, 1997, and 1996,
respectively, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
-------------------- ---------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,703 $ 2,794 $12,529 $ 9,479
Less: Gains on sales of real estate investments . . . . . . . . . . (2,737) (83) (3,897) (1,115)
Plus: Real property depreciation. . . . . . . . . . . . . . . . . 2,453 2,472 7,344 7,404
Amortization of tenant
improvement costs . . . . . . . . . . . . . . . . . . . . 202 228 598 649
Amortization of leasing-related costs . . . . . . . . . . . 76 187 237 349
------- ------- ------- -------
Funds From Operations. . . . . . . . . . . . . . . . . . . . . . . . $ 5,697 $ 5,598 $16,811 $16,766
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
11
<PAGE>
Note H: RECENT DEVELOPMENTS
During October, 1997, the Company sold its Fresno, California, property, a
single tenant restaurant, for $1,250,000. The Company plans on using the
sales proceeds to purchase real estate pursuant to a tax-deferred exchange.
The Company will recognize a gain of approximately $1,001,000 on the sale of
this property.
On October 27, 1997, following a 30-day notification period, the Company's 8%
Convertible Debentures, with a $60.5 million principal balance, were redeemed
using cash and cash equivalents as well as an advance on the line of credit.
The Company will recognize an extraordinary loss of approximately $1.6
million from the extinguishment of the convertible debentures as a result of
the write-off of the related deferred long-term debt issuance costs.
12
<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 actual results, performance,
or achievements to be materially different from any future results,
performance, or achievements expressed or implied by such "forward-looking"
statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flows provided by operations and other
sources available to the Company 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 Company's indentures executed in connection with the Company'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 September 30, 1997, the Company had $45 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 LIBOR
plus 1.22%. The bank line of credit expires June 30, 2000, at which time the
Company intends to replace or renew it. Additionally, the Company had $41.7
million in cash and cash equivalents. The balance outstanding under the line
of credit was paid off using the proceeds from the September 1997 sale of
Senior Notes pending the redemption of Convertible Debentures on October 27,
1997.
The Company also has $7.3 million in disposition proceeds with a third-party
exchange facilitator, as of September 30, 1997, which are expected to be used to
fund future property acquisitions.
COMMITMENTS AND CONTINGENCIES
During September, 1997, the Company called its 8% Convertible Debentures for
redemption. The $60.5 million principal balance was redeemed on October 27,
1997.
As of September 30, 1997, the Company had commitments under several new leases
which will result in expenditures of approximately $2.6 million in future real
estate improvements and leasing commissions.
During March, 1997, the Company entered into an agreement to purchase a shopping
center with 70,483 leasable square feet located in Northern California for $4.5
million. The Company anticipates, subject to completion of due diligence,
completing this purchase during the fourth quarter of 1997, using the proceeds
from the recent sales of properties.
13
<PAGE>
FUNDS FROM OPERATIONS
As noted in Footnote G of the NOTES TO FINANCIAL STATEMENTS, the Company
considers Funds From Operations to be an alternate measure of the performance
of an equity REIT.
Funds From Operations (1995 NAREIT definition) increased $99,000, or 2%, to
$5,697,000 for the three months ended September 30, 1997, from $5,598,000
reported for the comparable quarter in 1996.
Funds From Operations for the nine months ended September 30, 1997, increased
$45,000 to $16,811,000 compared to $16,766,000 for the 1996 comparable
nine-month period.
RESULTS OF OPERATIONS
COMPARISON OF QUARTER ENDED SEPTEMBER 30, 1997 AND 1996
Net income increased $2,909,000 to $5,703,000 for the quarter ended September
30, 1997, a 104% increase over $2,794,000 for the comparable period in 1996.
On a per share basis, net income increased from $0.16 in 1996 to $0.33 in
1997. The gains recorded on the sale of two properties comprise over 90% of
this increased net income. Other factors include decreased (i) property
operating costs, (ii) depreciation and amortization and (iii) other operating
expenses, partially offset by decreased recoveries from tenants.
Property operating costs decreased $472,000 to $1,731,000 for the quarter
ended September 30, 1997 from $2,203,000 for the comparable quarter in 1996.
This decrease is partially offset by decreased recoveries from tenants during
the same period. For the three month period ended September 30, 1997,
recoveries from tenants decreased $435,000 to $1,438,000 from $1,873,000 for
the same quarter in 1996. Decreased property operating costs as well as
decreased recoveries result primarily from the absence of recoverable,
non-recurring work performed on several shopping centers during the summer of
1996.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income increased $3,050,000, or 32%, to $12,529,000 for the nine month
period ended September 30, 1997 from $9,479,000 in the comparable period in
1996. On a per share basis, net income increased to $0.73 in 1997 as compared
with $0.56 in 1996. Gains recorded on the sale of four properties comprise over
90% of this increased net income. Other factors include decreased (i) other
operating expenses and (ii) property operating costs, partially offset by
decreased recoveries from tenants.
Other operating expense decreased $353,000 to $1,702,000 for the nine month
period ended September 30, 1997 from $2,055,000 for the comparable period in
1996. The most significant factor in the 1997 decrease over 1996 is a decrease
in leasing and property management expenses.
14
<PAGE>
Property operating costs decreased $320,000 to $5,922,000 for the nine month
period ended September 30, 1997 from $6,242,000 for the comparable period in
1996. This decrease is partially offset by decreased recoveries from tenants
during the same period. For the nine months ended September 30, 1997,
recoveries from tenants decreased $269,000 to $4,916,000 from $5,185,000 for the
comparable period in 1996. Decreased property operating costs as well as
decreased recoveries result primarily from the absence of recoverable,
non-recurring work performed on several shopping centers during the summer of
1996.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have any derivative financial instruments or derivative
commodity instruments.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1 - 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. 333-32721 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).
(4.4) Form of Supplemental Indenture relating to the 7.1% Senior
Notes (filed as Exhibit 4.5 on Form 8-K, dated
September 24, 1997, and incorporated herein by reference).
(4.5) Form of Supplemental Indenture relating to the 7.2% Senior
Notes (filed as Exhibit 4.6 on Form 8-K, dated
September 24, 1997, and incorporated herein by reference.
(4.6) Form of Supplemental Indenture relating to the 7.3% Senior
Notes (filed as Exhibit 4.7 on Form 8-K, dated
September 24, 1997, 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).
(27) Financial Data Schedule
16
<PAGE>
(b) Reports on Form 8-K.
During the period covered by this report, the Company filed the
following Current Reports:
Form 8-K, dated September 24, 1997
The Form 8-K filing summarized the sale of $75 million of Senior
Notes.
* Management contract or compensatory plan or arrangement.
17
<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: November 6, 1997
--------------------------
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND BALANCE SHEET AT SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 41,684
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 388,372
<DEPRECIATION> 74,959
<TOTAL-ASSETS> 379,141
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 185,259
0
0
<COMMON> 242,090
<OTHER-SE> (51,973)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 379,141
<SALES> 0
<TOTAL-REVENUES> 34,373
<CGS> 0
<TOTAL-COSTS> 7,624<F4>
<OTHER-EXPENSES> 9,551<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,566
<INCOME-PRETAX> 12,529
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,529
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73<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 ($5,922) AND OTHER OPERATING
EXPENSES ($1,702).
<F5>AMOUNT COMPRISED OF DEPRECIATION EXPENSE ($8,255) AND GENERAL AND
ADMINISTRATIVE EXPENSE ($1,296).
<F6>EXERCISE OF THE OUTSTANDING STOCK OPTIONS WOULD NOT HAVE MATERIAL EFFECT ON
EARNINGS PER SHARE.
</FN>
</TABLE>
