<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, 1998
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 - 17,204,313 shares as of March 31,
1998
1
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WESTERN INVESTMENT REAL ESTATE TRUST
INDEX TO 10-Q
<TABLE>
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Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 3
Balance Sheets - March 31, 1998, and December 31, 1997 4
Statements of Income - Three months ended March 31, 1998, and 1997 5
Statements of Shareholders' Equity - Three months ended March 31, 1998, 6
and year ended December 31, 1997
Statements of Cash Flows - Three months ended March 31, 1998, and 1997 7
Notes to Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial 13-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 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 17-28
SIGNATURE 29
</TABLE>
2
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PART I. FINANCIAL INFORMATION
3
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST
- -----------------------------------------------------------------------------------------------------
(Unaudited)
MARCH 31, December 31,
ASSETS 1998 1997
------------------------------------
(In thousands, except share data)
<S> <C> <C>
Real estate investments:
Real estate properties . . . . . . . . . . . . . . . . . . $431,310 $392,470
Less accumulated depreciation and amortization . . . . . . (80,572) (77,642)
-------- --------
350,738 314,828
Real estate properties held for sale . . . . . . . . . . . 5,382 5,382
Less accumulated depreciation and amortization . . . . . . (1,861) (1,861)
-------- --------
3,521 3,521
Mortgage notes receivable . . . . . . . . . . . . . . . . 1,285 --
-------- --------
Net real estate investments . . . . . . . . . . . . . . . 355,544 318,349
Cash and cash equivalents . . . . . . . . . . . . . . . . . . 842 1,463
Accounts receivable and other assets. . . . . . . . . . . . . 8,821 16,636
Deferred long-term debt issuance costs, net . . . . . . . . . 1,191 1,073
-------- --------
$366,398 $337,521
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank line of credit . . . . . . . . . . . . . . . . . . . . . $ 41,600 $ 19,100
Senior notes, net . . . . . . . . . . . . . . . . . . . . . . 124,773 124,766
Mortgage Payable. . . . . . . . . . . . . . . . . . . . . . . 10,150 --
-------- --------
176,523 143,866
Interest payable. . . . . . . . . . . . . . . . . . . . . . . 890 2,917
Prepaid rents and security deposits . . . . . . . . . . . . . 1,796 1,428
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 3,980 3,061
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 183,189 151,272
-------- --------
-------- --------
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:
March 31, 1998 - 17,204,313 shares
December 31, 1997 - 17,191,860 shares . . . . . . . . . 242,065 242,682
Accumulated dividends in excess of net income. . . . . . . (58,856) (56,433)
-------- --------
Commitments and contingencies (Note C, E and F)
Total shareholders' equity . . . . . . . . . . . . . . . . 183,209 186,249
-------- --------
$366,398 $337,521
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended
March 31,
---------
1998 1997
-----------------------------------------------
(In thousands, except share and per share data)
<S> <C> <C>
REVENUES:
Minimum rents. . . . . . . . . . . . . . . . . . . . . . . $ 10,050 $ 9,378
Percentage rents . . . . . . . . . . . . . . . . . . . . . 214 167
Recoveries from tenants. . . . . . . . . . . . . . . . . . 1,448 1,498
Other income . . . . . . . . . . . . . . . . . . . . . . . 160 98
----------- -----------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . 11,872 11,141
----------- -----------
EXPENSES:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 2,949 2,816
Property operating costs . . . . . . . . . . . . . . . . . 1,571 1,595
Depreciation and amortization. . . . . . . . . . . . . . . 3,047 2,727
Other operating expenses . . . . . . . . . . . . . . . . . 995 732
General and administrative . . . . . . . . . . . . . . . . 919 482
----------- -----------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 9,481 8,352
----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,391 $ 2,789
----------- -----------
----------- -----------
Basic and diluted earnings per share data:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 0.14 $ 0.16
----------- -----------
Cash dividends paid. . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.28
----------- -----------
Weighted average number of shares outstanding--Basic . . . . 17,194,402 17,138,432
----------- -----------
Weighted average number of shares outstanding--Diluted. . . . 17,266,092 17,146,080
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
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<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended March 31, 1998,
and Year Ended December 31, 1997
(In thousands, except share data)
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, 1997. . . . . . . . . 17,138,432 $242,054 $(50,106) $191,948
Net proceeds from issuance of shares. . . 53,160 622 -- 622
Debenture redemptions . . . . . . . . . . 268 6 -- 6
Net income. . . . . . . . . . . . . . . . -- -- 12,880 12,880
Cash dividends paid . . . . . . . . . . . -- -- (19,207) (19,207)
---------- -------- -------- --------
Balance, December 31, 1997. . . . . . . . 17,191,860 242,682 (56,433) 186,249
Net proceeds from issuance of shares. . . 12,453 182 -- 182
Loans to officers . . . . . . . . . . . . -- (799) -- (799)
Net income. . . . . . . . . . . . . . . . -- -- 2,391 2,391
Cash dividends paid . . . . . . . . . . . -- -- (4,814) (4,814)
---------- -------- -------- --------
BALANCE, MARCH 31, 1998 . . . . . . . . . 17,204,313 $242,065 $(58,856) $183,209
---------- -------- -------- --------
---------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
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<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS WESTERN INVESTMENT REAL ESTATE TRUST
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended
March 31,
---------
1998 1997
-----------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,391 $ 2,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 3,047 2,727
Amortization of deferred debt issuance costs . . . . . . . 81 87
(Increase) Decrease in accounts receivable and other . . . (691) 264
Increase in deferred rent receivable . . . . . . . . . . . (27) (29)
Decrease in interest payable . . . . . . . . . . . . . . . (2,027) (985)
Increase in prepaid rents and security deposits
and other liabilities . . . . . . . . . . . . . . . . 1,287 411
---------- ---------
Net cash provided by operating activities. . . . . . . . . 4,061 5,264
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate investments . . . . . . . . . . . (28,254) (283)
Funds released from escrow. . . . . . . . . . . . . . . . . . 7,117 --
Improvements of real estate investments:
Build-to-suit developments . . . . . . . . . . . . . . . . (108) (193)
New leases . . . . . . . . . . . . . . . . . . . . . . . . (337) (478)
General. . . . . . . . . . . . . . . . . . . . . . . . . . (226) (11)
Recovery of investment in direct financing leases . . . . . . 92 74
---------- ---------
Net cash used in investing activities. . . . . . . . . . . (21,716) (891)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank line of credit . . . . . . . . . . . . . . . 31,300 7,900
Principal payments on bank line of credit . . . . . . . . . . (8,800) (7,450)
Principal payments on mortgage note payable . . . . . . . . . (15) --
Loans to officers . . . . . . . . . . . . . . . . . . . . . . (799) --
Net proceeds from issuance of shares. . . . . . . . . . . . . 182 --
Senior notes issuance costs . . . . . . . . . . . . . . . . . (20) --
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . (4,814) (4,799)
---------- ---------
Net cash provided by (used in) financing activities. . . . 17,034 (4,349)
---------- ---------
Net (decrease) increase in cash and cash equivalents . . . (621) 24
Cash and cash equivalents, at the beginning of period. . . . 1,463 952
---------- ---------
Cash and cash equivalents, at the end of period . . . . . . . $ 842 $ 976
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . $ 4,913 $ 3,716
---------- ---------
NON CASH FINANCING ACTIVITIES:
Real estate acquisition debt. . . . . . . . . . . . . . . . . $ 10,266 $ --
---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
Notes to Financial Statements
March 31, 1998
(Unaudited)
Note A: ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING
PRONOUNCEMENTS
(A) DESCRIPTION OF ORGANIZATION
Western Investment Real Estate Trust, is a self-administered and self-managed
real estate investment trust (REIT). As such, the Company engages in ownership,
development, construction, acquisition, leasing, marketing and management of
neighborhood and community shopping centers, commercial office buildings and
industrial properties located in Northern California and Northern Nevada. At
March 31, 1998, the Company's real estate portfolio was comprised of 55
properties, 44 of which were retail properties.
(B) BASIS OF PRESENTATION AND USE OF ESTIMATES
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. The interim
financial statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim periods
presented.
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.
(C) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Financial Accounting Statement No. 130 (SFAS
130), REPORTING COMPREHENSIVE INCOME. The Company has adopted SFAS 130 for
reporting total comprehensive income in the financial statements for interim
periods beginning in 1998. In June 1997, the 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. In February 1998, the
FASB issued Financial Accounting Statement No. 132 (SFAS 132), EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS. The Company
will adopt SFAS 132 in the year-end 1998 financial statements, the effective
date of SFAS 132. Management believes that the adoption of these statements
will not have a material impact on the Company's financial statements.
NOTE B: REAL ESTATE INVESTMENTS
At March 31, 1998, the Company owned 55 properties, totaling 5.1 million
leasable square feet. Included in this total are three properties, which were
held for sale and total 91,000 leasable square feet.
8
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During the quarter ended March 31, 1998, the Company acquired two community
shopping centers in California. Century Center, a 214,770 square foot community
shopping center, located in Modesto was acquired for $17.5 million and Lakewood
Village, a 126,500 square foot community shopping center located in Windsor was
purchased for $20.9 million. The Company financed these acquisitions with $7.1
million of tax-deferred exchange proceeds, advances under its line of credit and
the assumption of a $10.2 million existing mortgage.
Additionally, during the quarter ended March 31, 1998, the Company signed a
10-year lease on its commercial property located in Petaluma, California.
Occupancy percentages for the Company's portfolios are as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997 March 31, 1997
-------------- ----------------- --------------
<S> <C> <C> <C>
Retail 92.7% 92.7% 94.1%
Commercial 94.2% 76.2% 74.9%
Industrial 100.0% 100.0% 100.0%
Overall Occupancy 92.9% 92.2% 93.5%
</TABLE>
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.
9
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Note C: CAPITAL EXPENDITURES
It is the Company's practice to capitalize certain costs, which exceed $4,000
and which 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 months ended March 31, 1998,
and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
----------------------
(In thousands)
<S> <C> <C>
"Build to Suit" capital improvements. . . . . . . $108 $193
Capitalized costs incurred in connection with
leasing previously UNLEASED space. . . . . . . 32 97
Capitalized costs incurred in connection with
leasing previously LEASED space . . . . . . . . 305 381
Capitalized costs which relate to
improvements to common areas. . . . . . . . . . 226 11
---- ----
Total Capitalized expenditures. . . . . . . . . . $671 $682
---- ----
---- ----
Improvements. . . . . . . . . . . . . . . . . . . $507 $557
Leasing-related costs . . . . . . . . . . . . . . 164 125
---- ----
Total capitalized expenditures. . . . . . . . . . $671 $682
---- ----
---- ----
</TABLE>
During the three months ended March 31, 1998, 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 March 31,
1998, and is reflected in the preceding table.
10
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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 Improvements Commissions
------------- --------------------------- ------------------------
Per Per
Aggregate Square Aggregate Square
Amount Foot Amount Foot
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Shopping Centers &
Retail Properties $440,350 $14.48 $90,614 $2.18
Commercial Properties 675,145 21.17 173,641 5.44
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capitalized Expenditures Associated with Lease Renewals
-------------------------------------------------------
Tenant Leasing
Property Type Improvements Commissions
------------- --------------------------- ------------------------
Per Per
Aggregate Square Aggregate Square
Amount Foot Amount Foot
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Shopping Centers &
Retail Properties $42,000 $9.80 $40,768 $1.04
</TABLE>
- -------------------------------------------------------------------------------
Note D: DIVIDEND REINVESTMENT PLAN AND STOCK OPTION PLAN
In accordance with the Company's Dividend Reinvestment Plan, the Company
received $166,000 and issued 11,053 shares of beneficial interest during the
quarter ended March 31, 1998.
Additionally, during the quarter ended March 31, 1998, 1,400 options previously
granted under the Company's non-qualified stock option plan were exercised. The
average exercise price was $11.46 per share.
11
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Note E: LOANS TO OFFICERS
The Board of Trustees approved loans totaling $1.3 million to the Company's
Chief Executive Officer; Chief Financial Officer; Senior Vice President,
Investments and Senior Vice President, Operations. The loans bear interest at a
rate of 5.58%, are recourse and are secured by a pledge of certain shares of
beneficial ownership of the Company.
At March 31, 1998 the outstanding balance of these loans was $799,000.
Note F: MORTGAGE NOTE RECEIVABLE
As of March 31, 1998 the Company held one mortgage note receivable representing
a 10-year note received when the Company sold its Concord, California, property
in August, 1997. For the first five-year period, the note carries a fixed
interest rate of 8.5%, after which the interest rate is fixed at 9.0% for the
next five year period.
Note G: SUBSEQUENT EVENTS
On April 28, 1998, the Company increased its unsecured bank line of credit to
$75 million from $55 million.
12
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
CAUTIONARY STATEMENTS
The discussions in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contain certain forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 which reflect
management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties including, but not limited to, the effects of future events on the
Company's financial performance; the risk that the Company may be unable to
finance its planned acquisition and development activities; risks related to the
retail, commercial or industrial businesses in which the Company's properties
compete, including the potential adverse impact of external factors such as
inflation, consumer confidence, unemployment rates and consumer tastes and
preferences; risks associated with significant tenants including the potential
adverse impact should the significant tenant experience financial difficulties;
risks associated with the Company's development activities, such as the
potential for cost overruns, delays and lack of predictability with respect to
the financial returns associated with these development activities; the risk of
potential increase in market interest rates from current rates; and risk
associated with real estate ownership, such as the potential adverse impact of
environmental contamination or changes in the local economic climate on the
revenues and the value of the Company's properties.
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 be used
to provide the funds necessary to achieve future growth.
The Company's agreements executed in connection with the Company's senior notes
and its 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 additional
debt and other restrictions on the Company.
As of March 31, 1998, the Company's aggregate outstanding indebtedness of
$176,523,000 consisted of $124,773,000 in fixed rate, long-term, unsecured
senior notes, $41,600,000 of borrowings under the Company's variable rate,
unsecured bank line and $10,150,000 fixed-rate loan secured by the Company's
Windsor property.
In connection with the redevelopment of a property located in Walnut Creek,
California, the Company has obtained an irrevocable standby letter of
credit in the amount of $3,336,000 from one of the lenders with which the
Company has its line of credit. The availability under the line of credit is
reduced by the amount of the letter of credit. This letter of credit expires
April 30, 2006.
13
<PAGE>
As of March 31, 1998, the Company had $10 million available under its $55
million bank line of credit. On April 28, 1998, the Company increased its
unsecured bank line of credit to $75 million. 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.
COMMITMENTS AND CONTINGENCIES
As of March 31, 1998, the Company had commitments under several new leases
which will result in expenditures of approximately $2.2 million in real estate
improvements and leasing commissions.
FUNDS FROM OPERATIONS
Industry analysts and the Company consider Funds from Operations (FFO) 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
income 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, considers
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 calculated in accordance with generally
accepted accounting principles (GAAP), plus depreciation and amortization of
assets uniquely significant to the real estate industry, reduced by gains and
increased by losses on (i) sales of property. and (ii) extraordinary items.
FFO does not represent cash flows from operations as defined by GAAP 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.
Furthermore, FFO as disclosed by other REIT's may not be comparable to the
Company's calculation of FFO.
14
<PAGE>
The table below provides a reconciliation of net income in accordance with GAAP
to FFO as calculated in accordance with NAREIT's guidelines, for the three
months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
----------------
(In thousands)
<S> <C> <C>
Net Income. . . . . . . . . . . . . . . . . . . . $ 2,391 $ 2,789
Plus: Real property depreciation. . . . . . . . . 2,669 2,445
Amortization of tenant
improvement costs . . . . . . . . . . . . 262 177
Amortization of leasing-related costs . . . 92 77
------- -------
Funds From Operations . . . . . . . . . . . . . . $ 5,414 $ 5,488
------- -------
------- -------
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 31, 1998 AND 1997
Net income decreased $398,000 to $2,391,000 for the quarter ended March 31,
1998, a 14% decrease from $2,789,000 for the comparable period in 1997. On a
per share basis (calculated using both basic and fully diluted weighted average
shares outstanding), net income decreased from $0.16 in 1997 to $0.14 in 1998.
The major components of this decrease were increased (i) general and
administrative expenses; (ii) other operating expenses; and (iii)
depreciation and amortization; partially offset by increased minimum rents.
General and administrative expense increased $437,000 to $919,000 for the
quarter ended March 31, 1998 from $482,000 for the quarter ended March 31, 1997.
Other operating expenses increased $263,000 to $995,000 for the quarter ended
March 31, 1998 from $732,000 for the comparable quarter in 1997. These
increases are due primarily to (i) increased compensation costs associated with
changes in senior management and (ii) increased staffing associated with the
company's enhanced acquisition capabilities. The Company is in the process of
forming an acquisition department and increasing property management staffing to
maximize the performance of its portfolio.
Depreciation and amortization increased $320,000 to $3,047,000 for the quarter
end March 31, 1998 from $2,727,000 for the comparable quarter in 1997. This
increase results primarily from the acquisition of two properties during the
first quarter of 1998.
Minimum rent increased $672,000 to $10,050,000 in the first quarter of 1998 from
$9,378,000 for the comparable 1997 quarter. This increase results primarily
from the acquisition of two properties during the first quarter of 1998.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments or derivative
commodity instruments.
16
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
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 Senior Notes
(filed as Exhibit 4.1 to Registration Statement on
Form S-3 No. 33-71270 and incorporated herein by
reference).
(4.2) Form of Senior Notes (filed as Exhibit 4.2 to
Registration Statement on Form S-3 No. 33-71270 and
incorporated herein by reference).
(4.3) 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).
(4.4) 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).
(4.5) 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)* Company'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)* Company's Trustee Emeritus Plan (filed as an
Exhibit to Proxy Statement dated March 25, 1986 and
incorporated herein by reference).
(10.3)* Compensation Agreement (filed as Exhibit 10.3 to
Registrant's 10-K for the fiscal year ended
December 31, 1997, and incorporated herein by
reference.
17
<PAGE>
<CAPTION>
Page No.
--------
<S> <C>
(10.4)** Management Contracts 18-28
(27) Financial Data Schedule.
-------------
* Management contract or compensatory plan or arrangement
** Filed with this report
(b) Reports on Form 8-K.
None
</TABLE>
18
<PAGE>
January 28, 1998
Mr. Bradley N. Blake
3065 Oakraider Drive
Alamo, CA 94507
Dear Brad:
It is with pleasure that I set forth the negotiated terms of your employment as
CEO and President of Western Investment Real Estate Trust as follows:
Effective: January 28, 1998
Base Annual Salary: $300,000
Incentive Compensation: $100,000 guaranteed for first year, payable at
completion of 12 months; additionally potential $25,000
- $50,000 contingent upon meeting FFO targets as
reasonably determined (1998 FFO targets have been
determined and agreed to); incentive opportunities will
be available for future years.
Employer 401(k)
Contribution: Match equal to 50% of employee's deferral plus 3%
employer discretionary award subject to company
performance (match and award limited to first $150,000
of compensation due to IRS rules - current award would
equal $9,000)
Stock Options: 250,000 share grant (subject to shareholder approval of
increase in size of company option plan or of a new
more comprehensive plan); grant to be made effective as
of the execution of this agreement at a strike price
equal to the daily average as reported by the AMEX on
grant date; vesting period to be five years at 20% per
year. If for any reason the option plan amendment (or
the 1988 stock option plan) is not approved by the
shareholders, the company will make a comparable
economic value available.
Restricted Stock: 15,000 shares at no payment by employee (subject to
shareholder approval of the 1998 stock option plan);
vesting period to be three years from date of grant; to
vest one-third per year.
19
<PAGE>
Stock Purchase Loan: To assist employee in purchasing additional shares in
the company, employee will receive a $500,000 loan with
interest, payable quarterly, at an interest rate equal
to the applicable Federal Rate for mid-term
obligations; dividends to be paid to employee; loan
principal to be payable annually in 20% increments
commencing on the third anniversary of the loan. The
Board may forgive a portion or all of the remaining
principal balance, if company performance measures are
met (as set and revised from time to time and as more
specifically agreed to by the parties in a separate
document).
Medical Benefits: Premium for employee paid 100% and premium for spouse
and children paid 50%.
Section 125 Plan: Dependent care: pretax to $5,000 per year
Medical expenses: pretax to $1,200 per year
Vacation: Four weeks per calendar year
Life Insurance: Term policy with a benefit of $500,000
Long-term Disability
Insurance: $2,000 per month benefit
Change of Control: If employment is terminated by company incident to, or
in anticipation of, a Change of Control, then there
shall be a severance package to include lump-sum cash
payment equal to two (2) times annual salary and cash
bonus based on the greater of the prior two years cash
compensation (lump-sum payment not to be less than
$800,000); all options, restricted stock and other
stock subject to vesting will vest 100% as of the date
of change of control.
Termination for
Other than Cause: Severance package to include lump-sum cash payment
equal to the prior year salary and cash bonus (lump-sum
payment not to be less than $400,000); no acceleration
of vesting beyond termination date. The stock purchase
loan balance together with any accrued interest will be
due and payable in accordance with the terms of the
loan documents.
Board Seat: Company to use best efforts to have employee installed
for the duration of his employment as a member of the
Board.
20
<PAGE>
Bonus Pro Ration: In all cases of employment termination other than
for cause or related to a Change of Control, bonus
will be pro-rated through the date of termination
and paid when appropriate information available to
determine bonus amount (in addition to any
severance benefits).
Additionally, the parties agree to "Definitions" set forth on Exhibit A to this
letter and the company acknowledges being made aware in writing of certain
pre-existing investments and commitments of employee and approves of same to the
extent that they otherwise might represent a conflict of interest.
Effective with your counter signature, the foregoing will be a legally binding
agreement.
We look forward to your joining Western.
Sincerely,
s/O. A. Talmage
- ---------------
O. A. Talmage
Chairman
Accepted and agreed to:
s/ Bradley N. Blake
- -------------------
Bradley N. Blake
21
<PAGE>
February 5, 1998
Mr. Gerald Hunt
180 Emerald Dr.
Danville, CA 94526
Dear Jerry:
It is with pleasure that I set forth the terms of your employment as Senior Vice
President, Operations of Western Investment Real Estate Trust as follows:
EFFECTIVE DATE: No later than February 23, 1998.
BASE ANNUAL SALARY: $150,000.
INCENTIVE COMPENSATION: $25,000 guaranteed for first year,
payable at completion of 12 months;
additionally shall receive 15% of the
bonus pool in January 1998 contingent
upon meeting FFO targets as reasonably
determined (1998 FFO targets were
approved by the Board of Trustees on
February 4, 1998); incentive
compensation opportunities will be
available for future years.
EMPLOYER 401(K) CONTRIBUTION: Match equal to 50% of employee's
deferral plus 3% employer discretionary
award subject to company performance
(match and award limited to first
$150,000 of compensation due to IRS
rules - current award would equal
$9,000). Under the current plan,
employee's participation would commence
in January 1, 1999.
STOCK OPTIONS: 48,000 share grant (subject to
shareholder approval of increase in size
of company option plan or of a new more
comprehensive plan); grant to be made
effective as of the execution of this
agreement or February 9, 1998, whichever
is later, at a strike price equal to the
daily average as reported by the AMEX on
grant date; vesting period to be five
years at 20% per year. If for any reason
the option plan amendment (or the 1998
stock option plan) is not approved by
the shareholders, the company will make
a comparable economic value available.
RESTRICTED STOCK: 7,500 shares at no payment by employee
(subject to shareholder approval of the
1998 stock option plan); vesting period
to be three years from date of grant; to
22
<PAGE>
vest one-third per year. If for any
reason the option plan amendment (or the
1998 stock option plan) is not approved
by the shareholders, the company will
make a comparable economic value
available.
STOCK PURCHASE LOAN: To assist employee in purchasing
additional shares in the company,
employee will receive a $250,000 loan
with interest, payable quarterly, at an
interest rate equal to the applicable
Federal Rate for mid-term obligations;
dividends to be paid to employee; loan
principal to be payable annually in 20%
increments commencing on the third
anniversary of the loan. The Board may
forgive a portion or all of the
remaining principal balance if company
performance measures are met (as set and
revised from time to time and as more
specifically agreed to by the parties in
a separate document).
MEDICAL BENEFITS: Premium for employee paid 100% and
premium for spouse and children paid
50%.
SECTION 125 PLAN: Dependent care: pretax to $5,000 per
year.
Medical expenses: pretax to $1,200 per
year.
VACATION: Three weeks per calendar year.
LIFE INSURANCE: Term policy with a benefit equal to
annual base compensation.
LONG-TERM DISABILITY INSURANCE: $2,000 per month benefit.
Change of Control: If employment is terminated by company
incident to, or in anticipation of, a
Change of Control, then there shall be a
severance package to include lump-sum
cash payment equal to annual salary and
cash bonus based on the greater of the
prior two years cash compensation
(lump-sum payment not to be less than
$175,000); all options, restricted stock
and other stock subject to vesting will
vest 100% as of the date of change of
control.
Additionally, the parties agree to "Definitions" set forth on Exhibit A to this
letter. Western will not announce your hiring to the company or to the public
until you have approved of same.
Effective with your countersignature, the foregoing will be a legally binding
agreement.
23
<PAGE>
We look forward to your joining Western.
Sincerely,
s/ Bradley N. Blake
-------------------
Bradley N. Blake
President & CEO
Accepted and agreed to:
s/ Gerald Hunt 2/8/98
- --------------------------------------------------------------------------------
Gerald Hunt Date
24
<PAGE>
February 5, 1998
Mr. Josh Smith
2001 Broadway, #405
San Francisco, CA 94115
Dear Josh:
It is with pleasure that I set forth the terms of your employment as Senior Vice
President, Investments of Western Investment Real Estate Trust as follows:
EFFECTIVE DATE: No later than February 23, 1998.
BASE ANNUAL SALARY: $165,000.
INCENTIVE COMPENSATION: $35,000 guaranteed for first year,
payable at completion of 12 months;
additionally shall receive 15% of the
bonus pool in January 1998 contingent
upon meeting FFO targets as reasonably
determined (1998 FFO targets were
approved by the Board of Trustees on
February 4, 1998); incentive
compensation opportunities will be
available for future years.
EMPLOYER 401(K) CONTRIBUTION: Match equal to 50% of employee's
deferral plus 3% employer discretionary
award subject to company performance
(match and award limited to first
$150,000 of compensation due to IRS
rules - current award would equal
$9,000). Under the current plan,
employee's participation would commence
in January 1, 1999.
STOCK OPTIONS: 48,000 share grant (subject to
shareholder approval of increase in size
of company option plan or of a new more
comprehensive plan); grant to be made
effective as of the execution of this
agreement or February 9, 1998, whichever
is later, at a strike price equal to the
daily average as reported by the AMEX on
grant date; vesting period to be five
years at 20% per year. If for any reason
the option plan amendment (or the 1998
stock option plan) is not approved by
the shareholders, the company will make
a comparable economic value available.
RESTRICTED STOCK: 7,500 shares at no payment by employee
(subject to shareholder approval of the
1998 stock option plan); vesting period
to be three years from date of grant; to
vest one-third per year. If for any
reason the option plan amendment (or the
1998 stock option plan) is not
25
<PAGE>
approved by the shareholders, the
company will make a comparable economic
value available.
STOCK PURCHASE LOAN: To assist employee in purchasing
additional shares in the company,
employee will receive a $250,000 loan
with interest, payable quarterly, at an
interest rate equal to the applicable
Federal Rate for mid-term obligations;
dividends to be paid to employee; loan
principal to be payable annually in 20%
increments commencing on the third
anniversary of the loan. The Board may
forgive a portion or all of the
remaining principal balance if company
performance measures are met (as set and
revised from time to time and as more
specifically agreed to by the parties in
a separate document).
MEDICAL BENEFITS: Premium for employee paid 100% and
premium for spouse and children paid
50%.
SECTION 125 PLAN: Dependent care: pretax to $5,000 per
year. Medical expenses: pretax to
$1,200 per year.
VACATION: Three weeks per calendar year.
LIFE INSURANCE: Term policy with a benefit equal to
annual base compensation.
LONG-TERM DISABILITY INSURANCE: $2,000 per month benefit.
Change of Control: If employment is terminated by company
incident to, or in anticipation of, a
Change of Control, then there shall be a
severance package to include lump-sum
cash payment equal to annual salary and
cash bonus based on the greater of the
prior two years cash compensation
(lump-sum payment not to be less than
$175,000); all options, restricted stock
and other stock subject to vesting will
vest 100% as of the date of change of
control.
Additionally, the parties agree to "Definitions" set forth on Exhibit A to this
letter. Western will not announce your hiring to the company or to the public
until you have approved of same.
Effective with your countersignature, the foregoing will be a legally binding
agreement.
26
<PAGE>
We look forward to your joining Western.
Sincerely,
s/ Bradley N. Blake
-------------------
Bradley N. Blake
President & CEO
Accepted and agreed to:
s/ Josh Smith 2/7/98
- --------------------------------------------------------------------------------
Josh Smith Date
27
<PAGE>
Exhibit "A"
Definitions of certain terms used in the attached employment Letter are as
follows:
1. "Change of Control" will mean each of the following: sale of all or
substantially all of the assets of the company; a merger,
consolidation, reorganization, or similar event as a result of which
the equity holders of the company do not continue to hold, in exchange
for their equity interests in the company, a majority of the
outstanding voting securities of the successor to the company's
business; or the change, in any twelve month period, of a majority of
the members of the company's board of trustees, excluding persons
elected or appointed to the Board during such twelve month period who
are approved by a majority of the persons who were trustees of the
company at the start of the twelve month period.
2. "Termination other than for cause" will mean: (a) termination by the
company other than for reason of conviction of a felony, material
breach of written contractual commitment, which breach is not cured
within 30 days of written notice, or willful failure to perform duties
reasonable assigned, which failure is not cured within 30 days of
written notice, or willful failure to perform duties reasonable
assigned, which failure is not cured within 30 days of written notice;
and (b) termination by the employee by reason of reduction in
compensation, reduction in responsibilities or change in title; or by
reason of required relocation of employee's primary place of business
outside of the San Francisco Bay Area.
28
<PAGE>
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 4, 1998
-------------
29
<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, 1998 AND
BALANCE SHEET AT MARCH 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 842
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 431,310
<DEPRECIATION> 80,572
<TOTAL-ASSETS> 366,398
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 176,523
0
0
<COMMON> 242,065
<OTHER-SE> (58,856)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 366,398
<SALES> 0
<TOTAL-REVENUES> 11,872
<CGS> 0
<TOTAL-COSTS> 2,566<F4>
<OTHER-EXPENSES> 3,966<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,949
<INCOME-PRETAX> 2,391
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,391
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<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 (1,571) AND OTHER OPERATING
EXPENSES (995).
<F5>AMOUNT COMPRISED OF DEPRECIATION EXPENSE (3,047) AND GENERAL AND ADMINISTRATIVE
EXPENSE (919).
</FN>
</TABLE>
