<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR THE ANNUAL AND
TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 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 character)
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
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------
None None
- ---------------------------------- -----------------------------
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF BENEFICIAL INTEREST, WITHOUT PAR VALUE
- -------------------------------------------------------------------------------
(Title of class)
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
----- -----
1
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting shares held by nonaffiliates of the
registrant on March 1, 1998, based on the reported closing sales price of the
Company's shares of beneficial interest on the American Stock Exchange on
such date, was $243,615,000. (The Company defines affiliates as those
required to report under Section 16 of the Securities Exchange Act of 1934).
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Shares of Beneficial Interest, No Par Value - 17,192,460 shares as of
March 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's proxy statement with respect to its 1998 Annual
Meeting of Shareholders which will be filed with the Commission regarding the
fiscal year covered by this Form 10-K are incorporated by reference in Part
III, Items 10, 11 and 12.
2
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
INDEX TO 10-K
<TABLE>
<CAPTION>
PART I Page
----
<S> <C> <C>
Item 1 Business 4 to 13
Item 2 Properties 13 to 16
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19 to 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk 25
Item 8 Financial Statements 26 to 45
Financial Statement Schedule 46 to 47
Additional Information: 1997 Building Improvement and Leasing
Related Cost Additions (unaudited) 48
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 49
PART III
Item 10 Directors and Executive Officers of the Registrant 49
Item 11 Executive Compensation 49
Item 12 Security Ownership of Certain Beneficial
Owners and Management 49
Item 13 Certain Relationships and Related Transactions 49
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 50 to 52
Signatures 53
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Western Investment Real Estate Trust ("The Company") is a real estate
investment trust ("REIT") and qualifies as such under Sections 856 and 960 of
the Internal Revenue Code. The Company was organized under the laws of the
State of California in 1962 and commenced real estate operations in 1964.
In order that the Company may continue to qualify as a REIT: (i) must be
taxable as a domestic entity, (ii) the beneficial ownership of which is held
by 100 or more persons, (iii) at least 95% of its gross income is derived from
real estate assets, dividends and interest, (iv) at least 75% of its gross
income is derived from real estate assets, (v) at the close of each quarter
of the taxable year, at least 75% of the value of its total assets is
reopresented by real estate assets, cash and government securities, and (vi)
the Company must distribute annually to its shareholders an amount equal to
or exceeding 95% of its REIT taxable income. Under the terms of its
Declaration of Trust, the Company is permitted to invest its funds in
ownership of real estate, mortgages, deeds of trust and certain financial
instruments as permitted by law. Substantially all of the Company's funds
have been invested in the ownership of real estate.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company is not engaged in different segments of a business nor is the
Company engaged in more than one line of business.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company, which at December 31, 1997 employed 45 people, is in the
business of acquiring, managing, leasing and developing retail, commercial
and industrial properties. Additionally, the Company's wholly owned
subsidiary, WIRET Asset Management Services, is a licensed real estate broker
in the state of California. At December 31, 1997, the Company owned 42 retail
properties, 9 commercial properties and 2 industrial properties with a
combined gross leasable area of 4.7 million square feet.
The Company's executive office is located at 3450 California Street, San
Francisco, California, 94118, and can be reached at (415) 929-0211.
Additionally, the Company maintains a regional office in the Sacramento area
and the Central Valley area.
4
<PAGE>
THE PROPERTIES
As of December 31, 1997, the Company owned 42 neighborhood and community
shopping centers and other retail properties with an average size of
approximately 106,000 square feet of GLA. Thirteen of these properties are
significant portions of larger, integrated shopping centers managed by the
Company with an average GLA of approximately 195,000 square feet. The Company
leases a substantial portion of its total GLA on a long-term, triple net
basis. As of December 31, 1997, approximately 63% of the Company's total
retail GLA was leased to anchor tenants of which 74% of the anchor tenant
space was leased to grocery or drug store anchor tenants. Additionally, as of
that date, approximately 80% of the Company's Annualized Base Rent (as herein
defined) was derived from national or regional retail tenants. The following
tables set forth, as of December 31, 1997, certain information with respect
to the Company's properties:
SHOPPING CENTER AND RETAIL - ANCHOR/NON-ANCHOR
<TABLE>
<CAPTION>
Annualized Percentage Annualized
Type of GLA Percentage Base Rent Of Base Rent
Tenant (Square of Leased Annualized Per Leased
Space (1) Feet) GLA Space (2) Base Rent Square Foot
----- ----- --- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Anchor................................ 2,823,266 63% $18,873,000 51% $ 6.68
Non-Anchor............................ 1,314,932 30% 18,444,000 49% 14.03
Unleased.............................. 326,562 7% --- --- ---
--------- ----- ----------- ------- ----------
----------
Total or Weighted Average....... 4,464,760 100% $37,317,000 100% $ 8.36
</TABLE>
SHOPPING CENTER AND RETAIL - NATIONAL/REGIONAL/LOCAL
<TABLE>
<CAPTION>
Annualized Percentage Annualized
Type of GLA Percentage Base Rent Of Base Rent
Tenant (Square of Leased Annualized Per Leased
Space (3) Feet) GLA Space (2) Base Rent Square Foot
----- ----- --- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
National.............................. 1,739,503 39% $15,443,000 41% $ 8.88
Regional.............................. 1,802,540 41% 14,445,000 39% 8.01
Local................................. 596,155 13% 7,429,000 20% 12.46
Unleased.............................. 326,562 7% --- --- ---
--------- ----- ------------- ------- ----------
----------
Total or Weighted Average....... 4,464,760 100% $37,317,000 100% $ 8.36
</TABLE>
5
<PAGE>
The Company's portfolio of 53 properties at December 31, 1997 is summarized as
follows:
ALL PROPERTIES
<TABLE>
<CAPTION>
Annualized Percentage Annualized
GLA Percentage Base Rent Of Base Rent
Property (Square of Leased Annualized Per Leased
Type Feet) GLA Space (2) Base Rent Square Foot
---- ---- --- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Shopping Center and Retail............ 4,464,760 95% $37,317,000 93% $ 8.36
Commercial............................ 177,371 4% 2,432,000 6% 13.71
Industrial............................ 78,322 1% 553,000 1% 7.06
---------- ----- ------------- ----- --------
--------
Total or Weighted Average....... 4,720,453 100% $40,302,000 100% $ 8.54
</TABLE>
(1) Tenants leasing 10,000 square feet or more are defined as "Anchor"
tenants.
(2) "Annualized Base Rent" represents the annualized minimum monthly rent
in effect on December 31, 1997.
(3) "National" tenants are tenants with locations in multiple states.
"Regional" tenants are tenants with three or more locations in one
state, and "Local" tenants are tenants with fewer than three locations
and operate exclusively within one state.
The following table summarizes the composition of the Company's real estate
investments as of December 31, 1997 by type based on amounts invested by the
Company:
<TABLE>
<CAPTION>
PORTFOLIO SUMMARY
Amount of
Number of Investment (1)
Property Types Investments (000's) Percentage
-------------- ----------- -------------- ----------
<S> <C> <C> <C>
Real Estate Investments
-----------------------
Shopping Center and Retail 41 $366,467 93%
Commercial 8 24,359 6%
Industrial 1 1,644 1%
-- ---------- ----
50 $392,470 100%
-- ---------- ----
-- ---------- ----
<CAPTION>
Real Estate Properties Held for Sale
------------------------------------
Shopping Center and Retail 1 $ 2,032 38%
Commercial 1 2,148 40%
Industrial 1 1,202 22%
-- ---------- ----
3 $ 5,382 100%
-- ---------- ----
-- ---------- ----
</TABLE>
(1) Reflects the original cost plus capital improvements, before depreciation
and amortization.
6
<PAGE>
REAL ESTATE INVESTMENTS AND PROPERTIES HELD FOR SALE (COMBINED)
<TABLE>
<CAPTION>
Percentage of Weighted Average
Property Number of Amount of Amount Occupancy Age
Type Investments Investment (1) Invested Rate (2) (in years) (3)
----- ----------- ---------- ----------- ---------- --------------
(000's)
<S> <C> <C> <C> <C> <C>
Shopping Center and Retail............ 42 $368,499 93% 93% 13.5
Commercial............................ 9 26,507 6% 76% 23.3
Industrial............................ 2 2,846 1% 100% 17.4
--- ---------- -- ---- ----
---- ----
Total or Weighted Average........ 53 $397,852 100% 92% 13.9
--- ---------- -- ---- ----
--- ---------- -- ---- ----
</TABLE>
(1) Reflects the original cost plus capital improvements, before
depreciation and amortization.
(2) Once a space is subject to an executed lease, the space is then
included in occupied space. A space continues to be incorporated in the
Company's occupied space until: (1) the related lease expires and the
tenant is no longer in legal possession, or (2) the related lease is
legally terminated and the tenant is no longer in legal possession.
(3) This calculation is weighted by Gross Leasable Area and is based on the
original construction date of the property. As such, any expansion or
renovation occurring subsequent to the original construction date is
not reflected in this calculation.
COMPETITION
There is considerable competition for the consumer dollar in most areas of
California and Nevada where the Company's community shopping center properties
are located. The Company believes that its major anchor tenants are strong
competitors and will continue to draw consumers to its shopping centers.
The Company competes for quality properties with other investors and engages in
a continuing effort to identify desirable properties for acquisition. As the
number of prospective buyers of the types of properties the Company considers
for purchase increases, the prices of such properties may increase and the yield
decrease. The Company believes it can continue to compete effectively in the
current real estate environment because of its experienced staff and management
team.
The Company competes for tenants primarily on the basis of location, rental
rates, services provided and the design and condition of the properties. In some
of the geographic areas in which the Company owns properties, the available
supply of space for lease exceeds the demand by prospective tenants. In order to
compete effectively, the Company employs experienced property and marketing
managers and leasing agents.
MAJOR TENANTS
The Company's principal shopping center and retail tenants include substantial,
well-recognized businesses such as Food-4-Less, Nob Hill Foods, Pak `N Save,
Raley's, Safeway, Save Mart Supermarket and Thrifty-Payless (Rite Aid).
7
<PAGE>
At December 31, 1997, Raley's, the Company's most significant tenant, a grocery
and drug retailer, was a lessee in 19 of the Company's properties and accounted
for 19% of the Company's 1997 total revenues. Raley's, a privately owned
company, currently operates 115 stores in Northern California and Nevada. The
Raley's organization has released information indicating that its sales exceeded
$2 billion in its most recent reported fiscal year (June 28, 1997). In addition
to receiving monthly sales reports, the Company receives audited financial
statements annually from Raley's and uses them to monitor Raley's financial
position and results of operations. Additionally, the Company is authorized to
provide Raley's audited financial statements to Moody's Investors Service and
Standard & Poor's, the Company's rating agencies. As of December 31, 1997, the
Company's Senior Notes carry "investment grade" ratings from Moody's Investors
Service (Baa3) and Standard & Poor's (BBB-). Please see note 7 in the Notes to
the Financial Statements.
The following table provides the location, size and expiration of the Raley's
leases:
<TABLE>
<CAPTION>
Lease
Location Gross Leasable Area Expiration Date
-------------------------------- ------------------- ---------------
<S> <C> <C>
1. Fallon, NV 0(1) 6/30/03
2. Fair Oaks, CA 59,231 3/31/06
3. Yuba City, CA 61,842 9/01/08
4. Carson City, NV 59,018 8/31/12
5. Redding, CA 60,000 5/31/14
6. Yreka, CA 60,000 11/30/14
7. Chico, CA 61,046 4/30/15
8. Winnemucca, NV 63,024 12/31/15
9. Fallon, NV 60,114 2/28/16
10. Reno, NV 61,046 3/31/16
11. Ukiah, CA 61,046 6/30/16
12. Elko, NV 61,000 1/31/17
13. Vallejo, CA 60,114 9/30/17
14. Folsom, CA 60,114 12/31/17
15. Turlock, CA 60,114 2/28/18
16. Grass Valley, CA 60,114 4/30/18
17. Granite Bay, CA 60,114 6/30/18
18. Suisun City, CA 60,114 5/31/19
19. Oroville, CA 59,885 6/01/19
</TABLE>
Note (1) Although Raley's no longer occupies this Fallon, Nevada,
property, it guarantees the J.C. Penney and Hub leases and
makes supplemental lease payments to the Company.
8
<PAGE>
The following table summarizes information on the Company's ten most significant
tenants as of December 31, 1997:
<TABLE>
<CAPTION>
Percentage of Company Percentage
Number of Annualized GLA of
Tenant Stores Base Rent (Square Feet) Company GLA
------ ------ --------- ------------- -----------
<S> <C> <C> <C> <C>
1. Raley's................................. 19 19% 1,091,181 23%
2. Save Mart............................... 7 4% 228,678 5%
3. Safeway/Pak `N Save..................... 3 4% 140,883 3%
4. Coast Federal Savings Bank.............. 6 4% 76,193 2%
5. Thrifty-PayLess (Rite Aid).............. 10 3% 242,056 5%
6. Food-4-Less (Fleming Foods)............. 3 2% 142,625 3%
7. Nob Hill Foods.......................... 3 2% 111,933 2%
8. Round Table Pizza....................... 14 2% 42,262 1%
9. Scolari's Supermarkets.................. 1 1% 50,451 1%
10. Ross Dress for Less..................... 2 1% 50,368 1%
---- ---------- ----
Total............................... 42% 2,176,630 46%
---- ---------- ----
---- ---------- ----
</TABLE>
The Company receives sales and other information on a monthly, quarterly or
annual basis from its retail tenants, including Raley's, under leases which
provide for such reports. The Company uses this information to monitor the
payment of percentage rents where leases so provide. The Company recognized
$552,000 and $649,000 of percentage rents during 1997 and 1996, respectively.
Virtually all of the Company's existing leases include at least one of the
following provisions for payment of additional rent: (1) scheduled fixed
increases, (2) percentage rent based on tenants' gross sales, or (3) CPI-based
escalation clauses. The Company endeavors to structure leases on a triple-net
basis with the lessees being responsible for most operating expenses, such as
real estate taxes, certain types of insurance, utilities, normal repairs and
maintenance. To the extent such provisions cannot be negotiated and incorporated
into a lease and in regard to vacant space, the Company pays such expenses from
current operating income.
INSURANCE COVERAGE
Most of the Company's leases require the tenant to be responsible for, or
reimburse the Company for liability insurance coverage on the properties. The
Company maintains umbrella liability insurance on all of its properties and
monitors tenant compliance with liability insurance coverage requirements.
While the Company believes its properties are adequately insured, the Company
does not carry earthquake, flood or pollution coverage. However, most major
anchor tenants are required to rebuild or repair their leased premises if
damaged or destroyed, regardless of the cause. Most of the Company's properties
are located in areas of California and Nevada where earthquakes have been known
to occur. In the event of a major earthquake, Company properties could suffer
substantial damage or destruction. Since it commenced real estate operations in
1964, the Company has not incurred any material expense nor, to its knowledge,
have any of its properties incurred any material damage from earthquakes or
floods.
9
<PAGE>
The Company periodically considers the merits of purchasing earthquake
insurance. As of December 31, 1997, the Company has not purchased earthquake
insurance because of: (i) the high premiums and deductibles and (ii) the
Company's geographically diversified portfolio that reduces the likelihood of
material loss as a consequence of earthquakes. Furthermore, the majority of
properties in the portfolio principally consist of relatively new single-story
buildings.
TENANT LEASE EXPIRATIONS FOR ALL PROPERTIES
The tables on the following page sets forth information with respect to anchor
and non-anchor tenant lease expirations as of December 31, 1997:
10
<PAGE>
<TABLE>
<CAPTION>
ANCHOR TENANTS (1)
Annualized Average Base
Gross Percentage of Base Rent Rent Per
Number of Leasable Total Leased Under Square Foot of
Lease Year Leases Area Gross Leasable Expiring Leases
Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring
- ---------- -------- -------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
1998.................................... 1 10,662 0.3% $ 84,444 $ 7.92
1999.................................... 4 127,704 2.9% 179,064 1.40
2000.................................... 7 117,912 2.7% 1,482,252 12.57
2001.................................... 4 144,602 3.3% 653,052 4.52
2002.................................... 6 113,410 2.6% 490,764 4.33
2003.................................... 9 215,978 5.0% 1,528,248 7.08
2004.................................... 3 54,207 1.3% 403,224 7.44
2005.................................... 3 88,518 2.0% 771,780 8.72
2006.................................... 4 205,831 4.7% 1,395,768 6.78
2007.................................... 1 20,664 0.5% 116,544 5.64
Thereafter.............................. 45 1,912,521 43.9% 14,749,081 7.71
--- --------- ----- ----------- ------------
------------
Total/Weighted Average 87 3,012,009 69.2% $21,854,221 $7.26
</TABLE>
<TABLE>
<CAPTION>
NON-ANCHOR TENANTS
Annualized Average Base
Gross Percentage of Base Rent Rent Per
Number of Leasable Total Leased Under Square Foot of
Lease Year Leases Area Gross Leasable Expiring Leases
Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring
- ---------- -------- -------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Month-to-month................ 28 55,995 1.3% $ 627,924 $11.21
1998.......................... 121 207,874 4.8% 3,139,680 15.10
1999.......................... 105 217,118 5.0% 2,751,797 12.67
2000.......................... 100 191,997 4.4% 2,872,514 14.96
2001.......................... 62 125,002 2.9% 1,780,080 14.24
2002.......................... 63 157,483 3.6% 2,334,013 14.82
2003.......................... 36 111,847 2.6% 1,782,780 15.94
2004.......................... 11 34,645 0.8% 542,352 15.65
2005.......................... 12 51,230 1.2% 707,340 13.81
2006.......................... 4 17,714 0.4% 306,804 17.32
2007.......................... 12 41,808 0.9% 901,500 21.56
Thereafter.................... 38 127,033 2.9% 2,316,432 18.23
---- ------- ------- --------- -------
-------
Total/Weighted Average 592 1,339,746 30.8% $20,063,216 $14.98
---- --------- ------- ----------- -------
-------
Total/Weighted Average 679 4,351,755 (4) 100.0% $41,917,437 $9.63
</TABLE>
(1) Anchor tenants are defined as tenants with 10,000 square feet or more
of leasable area.
(2) Does not reflect extension options granted to certain tenants.
(3) Annualized Base Rent at lease expiration.
(4) Total does not include 368,698 square feet GLA of unleased
space (326,562 square feet GLA of shopping center and retail,
and 42,136 square feet GLA of commercial).
11
<PAGE>
PROPERTY OPERATIONS
The Company is a fully integrated REIT that provides full property operation
services to all but two of its properties. Property operations includes
property management, marketing and leasing services. Internal management
provides for regular interaction between the Company and its tenants and
close supervision of its properties.
No single property investment accounted for more than 4.2% of total revenues
in 1997.
The Company directly manages 51 of its 53 properties. In order to facilitate
its present and future property operation activities, the Company maintains
two branch offices which are centrally located to the properties. The offices
are located at the Company's Country Gables shopping center in Granite Bay,
California and at the Victorian Walk shopping center in Fresno, California.
Internal management permits the Company to provide value added services to
its tenants. For example, the Company's marketing staff works with the
Company's tenants on promotional and advertising activities to draw consumers
to the shopping centers. These activities help the Company attract and retain
the national, regional and local retail tenants which serve the Northern
California and Nevada markets. The Company believes the cost of internal
property management and leasing is generally less expensive than employing
independent property management, marketing and leasing firms due to lower
commissions and fees and certain economies of scale.
Two of the Company's 53 properties are managed by independent property
managers. G & W Management Co. provides management services for the property
located in Petaluma, California, for fees equal to 3.5% of gross receipts.
The Company's property is part of a larger office park which is managed by G
& W Management Co. Commercial Real Estate Service (CRES) provides management
services with respect to Serra Center, located in Colma, California, for fees
equal to 3.5% of gross rents. CRES is an affiliate of the co-owner of the
Serra Center and has been managing the property for approximately 20 years.
Neither one of the above-named property managers are affiliated with the
Company, its trustees, officers or any shareholder owning 5% or more of the
Company's shares.
Repairs and maintenance of the Company's properties not undertaken by tenants
under the terms of the Company's triple-net leases are performed by
independent contractors not affiliated with the Company, its trustees or
officers, or any shareholder owning 5% or more of the Company's shares.
POTENTIAL ENVIRONMENTAL RISKS
Investments in real property create a potential for environmental liability
on the part of the owner of such real property. If hazardous substances are
discovered on or emanating from any of the Company's properties, the Company
and/or others may be held strictly liable for all costs and liabilities
relating to the clean-up of such hazardous substances.
12
<PAGE>
In order to mitigate environmental risks, in 1989 the Company adopted a
policy of obtaining at least a Phase I environmental study (a preliminary
site assessment which does not include environmental sampling, monitoring or
laboratory analysis) on each property it seeks to acquire. From time to time,
when the Company deems it appropriate, it has obtained independent
environmental analyses on properties acquired prior to 1989. Although the
Company has no knowledge that any material environmental contamination has
occurred, no assurance can be given that hazardous substances are not located
under any of the properties. The Company carries no insurance coverage
expressly for the type of environmental risk described above.
ITEM 2. PROPERTIES.
Property information is presented on the following pages.
13
<PAGE>
ITEM 2: PROPERTIES
<TABLE>
<CAPTION>
Minimum Rent
------------------ 12/31/97 Year Year Last
Name Location 1997 1996 Occupancy (1) Completed Renovated
---- -------- ---- ---- ------------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
I. Minimum Rents
Shopping Center/Retail
----------------------
Anderson Square Anderson, CA $350 $327 95.97% 1979
Angel's Camp Town Center Angel's Camp, CA 595 571 98.51% 1986
Skypark Plaza Shopping Center Chico, CA 1,371 1,297 95.36% 1985 1991
Coalinga Shopping Center Coalinga, CA 293 323 74.95% 1977
Serra Center (30% interest) Colma, CA 467 495 100.00% 1972
Carpeteria (2) Concord, CA 133 228 SOLD 1963
Mercantile Row Shopping Center Dinuba, CA 770 743 95.74% 1990
Luckys El Cerrito, CA 241 241 100.00% 1964 1983
Laguna 99 Shopping Center Elk Grove, CA 1,426 1,356 100.00% 1993
Northridge Shopping Center Fair Oaks, CA 763 770 92.15% 1958 1986
Commonwealth Square Shopping Center Folsom, CA 1,561 1,592 98.18% 1988
Acapulco Y Los Arcos (2) Fresno, CA 93 125 SOLD 1972
Victorian Walk Shopping Center Fresno, CA 804 795 93.72% 1982 1994
Country Gables Shopping Center Granite Bay, CA 1,245 1,247 93.75% 1988
Pinecreek Shopping Center Grass Valley, CA 952 939 93.02% 1988
Heritage Oak Shopping Center Gridley, CA 436 462 77.84% 1981
Centennial Plaza Shopping Center Hanford, CA 1,210 1,204 99.11% 1991
Nob Hill General Store Hollister, CA 480 480 100.00% 1994
Plaza 580 Shopping Center Livermore, CA 1,444 1,419 90.59% 1993/1996
Canal Farms Shopping Center Los Banos, CA 849 853 100.00% 1988
Mission Ridge Shopping Center Manteca, CA 1,141 1,112 93.07% 1993
San Antonio Center (2) Mountain View, CA 396 483 SOLD 1959 1990
Nob Hill General Store Newman, CA 313 313 100.00% 1995
Currier Square Shopping Center Oroville, CA 979 1,002 69.43% 1969 1989
Eastridge Plaza Shopping Center Porterville, CA 466 479 83.47% 1985
Belle Mill Landing Red Bluff, CA 699 812 89.16% 1982 1995
Cobblestone Shopping Center Redding, CA 919 930 82.66% 1981
Denny's (3) Redwood City, CA - 21 SOLD 1968
Kmart Center Sacramento, CA 362 372 89.01% 1964 1986
Elverta Crossing Shopping Center Sacramento, CA 1,172 1,185 96.01% 1991 1993
Luckys (2) Santa Maria, CA 15 49 SOLD 1962 1995
Kwik Stop (3) Santa Rosa, CA - 35 SOLD 1970 1995
Heritage Park Shopping Center Suisun, CA 1,400 1,223 92.58% 1989
Heritage Place Shopping Center Tulare, CA 888 1,005 96.33% 1986
Blossom Valley Plaza Turlock, CA 1,107 1,102 96.61% 1988 1991
Ukiah Crossroads Shopping Center Ukiah, CA 876 854 88.07% 1986
Park Place Shopping Center Vallejo, CA 1,577 1,579 88.48% 1987
Nob Hill General Store Watsonville, CA 195 195 100.00% 1982
Yreka Junction Yreka, CA 708 629 98.12% 1984
Raley's Shopping Center Yuba City, CA 914 971 94.62% 1963 1995
Eagle Station Shopping Center Carson City, NV 857 892 90.03% 1982
Elko Junction Shopping Center Elko, NV 1,285 1,033 91.27% 1979/1994/1996
Dodge Center Fallon, NV 224 282 100.00% 1976 1995
Raley's Supermarket Fallon, NV 401 401 100.00% 1991
Caughlin Ranch Shopping Center Reno, NV 1,102 969 100.00% 1990 1991
North Hills Shopping Center Reno, NV 843 831 89.59% 1986
West Town Winnemuca, NV 461 461 100.00% 1978 1991
------- -------
Sub-total - Shopping Center/Retail $34,782 $34,687
------- -------
</TABLE>
14
<PAGE>
ITEM 2: PROPERTIES
<TABLE>
<CAPTION>
Minimum Rent
------------------ 12/31/97 Year Year Last
Name Location 1997 1996 Occupancy (1) Completed Renovated
---- -------- ---- ---- ------------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Industrial
- ----------
Viking Freight Systems Santa Clara, CA $443 $422 100.00% 1978
Old Dominion Commerce City, CO 62 115 100.00% 1984 1995
---- ----
Sub-total - Industrial $505 $537
---- ----
Commercial
- ----------
US Postal Service (2) Boulder Creek, CA $ - $ 6 SOLD 1959
Coast Savings & Loan Cupertino, CA 216 216 100.00% 1980
Heald Business College Milpitas, CA 513 513 100.00% 1987 1995
Coast Savings & Loan Monterey,CA 450 450 100.00% 1963
Redwood II Petaluma, CA 25 483 0.00% 1985
Coast Savings & Loan Salinas, CA 321 320 100.00% 1937
Coast Savings & Loan (Market St) San Francisco, CA 291 291 100.00% 1964
Coast Savings & Loan (Taraval St) San Francisco, CA 328 328 100.00% 1975
3450 California St San Francisco, CA 230 226 100.00% 1957 1987
Coast Savings & Loan Santa Cruz, CA 184 184 100.00% 1980
------- -------
Sub-total - Commercial $2,558 $3,017
------- -------
Total Minimum Rent $37,845 $38,241
------- -------
------- -------
</TABLE>
<TABLE>
Percentage Rents
--------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
II. Percentage Rent
Anderson Square Anderson, CA $ 45 $ 56 95.97% 1979
Coalinga Shopping Center Coalinga, CA 67 62 74.95% 1977
Northridge Shopping Center Fair Oaks, CA 48 54 92.15% 1958 1986
Commonwealth Square Shopping Center Folsom, CA 7 5 98.18% 1988
Victorian Walk Shopping Center Fresno, CA 4 2 93.72% 1982 1994
Country Gables Shopping Center Granite Bay, CA 1 1 93.75% 1988
Pinecreek Shopping Center Grass Valley, CA - 1 93.02% 1988
Heritage Oak Shopping Center Gridley, CA 39 60 77.84% 1981
Centennial Plaza Shopping Center Hanford, CA - 2 99.11% 1991
Kmart Center Napa, CA 88 122 100.00% 1964
Cobblestone Shopping Center Redding, CA 14 4 82.66% 1981
Denny's (3) Redwood City, CA - 2 SOLD 1968
Kmart Center Sacramento, CA 62 47 89.01% 1964 1986
Luckys (2) Santa Maria, CA 43 104 SOLD% 1962 1995
Heritage Park Shopping Center Suisun, CA 1 2 92.58% 1989
Park Place Shopping Center Vallejo, CA 9 21 88.48% 1987
Nob Hill General Stores Watsonville, CA 83 84 100.00% 1982
Eagle Station Shopping Center Carson City, NV 21 18 90.03% 1982
Dodge Center Fallon, NV 14 2 100.00% 1976 1995
Caughlin Ranch Shopping Center Reno, NV 6 - 100.00% 1990 1991
---- --------
Total Percentage Rent Income $552 $649
---- --------
---- --------
</TABLE>
15
<PAGE>
ITEM 2: PROPERTIES
<TABLE>
<CAPTION>
Direct Financing
Leases(4)
------------------ 12/31/97 Year Year Last
Name Location 1997 1996 Occupancy (1) Completed Renovated
---- -------- ---- ---- ------------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
III. Direct Financing Leases
Kmart Center (5) Napa, CA $ 66 $ 99 100.00% 1964
Viking Freight Systems (6) Santa Clara, CA 89 98 100.00% 1978
---- --------
$155 $197
---- --------
---- --------
</TABLE>
(1) Once a space is subject to an executed lease, the space is then
included in occupied space. A space continues to be incorporated in
our occupied space until: 1) the related lease expires and the tenant
is no longer in legal possession, or 2) the related lease is formally
terminated and the tenant is no longer in legal possession.
(2) Sold in 1997.
(3) Sold in 1996.
(4) Included in Other Income.
(5) Kmart Center, Napa, California, is accounted for as a direct financing
lease. During 1997, the Company received $281,000 in minimum lease
payments, of which $66,000 comprised direct financing income and
$215,000 is a non-revenue receipt accounted as principal reduction.
During 1996, the Company received $281,000 in minimum lease payments, of
which $99,000 comprised direct financing income and $182,000 is a
non-revenue receipt accounted as principal reduction. This lease
expires January 1999.
(6) Viking Freight Systems, Santa Clara, California, is accounted for as a
direct financing lease. During 1997, the Company received $189,000 in
minimum lease payments, of which $89,000 comprised direct financing
income and $100,000 is a non-revenue receipt accounted as principal
reduction. During 1996, the Company received $189,000 in minimum lease
payments, of which $98,000 comprised direct financing income and $91,000
is a non-revenue receipt accounted as principal reduction. This lease
expires September 2003.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal actions arising in the normal course
of business. After taking into consideration legal counsel's evaluation of
such actions, management is of the opinion that their outcome will not have a
material adverse effect on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Principal Market:
The shares of beneficial interest of the Company, without par value, are
listed on the American Stock Exchange under the symbol "WIR". The following
table sets forth the high and low closing prices of the shares as reported by
the American Stock Exchange:
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends
- ------------- ---- --- ---------
<S> <C> <C> <C>
March 31, 1996 $11.750 $10.625 $0.28
June 30, 1996 13.000 10.750 0.28
September 30, 1996 13.125 12.000 0.28
December 31, 1996 13.875 12.500 0.28
March 31, 1997 13.500 $12.500 $0.28
June 30, 1997 14.000 12.375 0.28
September 30, 1997 13.875 12.813 0.28
December 31, 1997 14.750 12.688 0.28
Through
February 28, 1998 $15.250 $13.500 $0.28(1)
</TABLE>
(1) Paid March 15, 1998
Approximate number of equity security holders:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
(as of December 31, 1997)
<S> <C>
Shares of Beneficial Interest, without par value 2,136
</TABLE>
The Company estimates that there were over 18,000 beneficial owners of
shares, including owners whose shares were held in brokerage and Company
accounts.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share and share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues (1)..................................... $47,551 $47,789 $46,290 $43,308 40,239
Income before gains on sales of real
estate investments and extraordinary item..... 9,602 11,116 10,257 9,911 11,594
Net income ...................................... 12,880 12,231 10,304 15,266 11,594
Funds from operations (2)........................ 22,392 22,274 21,017 20,084 20,522
Cash flows from operating activities............. 23,145 21,956 20,203 20,212 21,900
Cash dividends paid ............................. 19,207 19,102 18,882 18,683 18,531
BASIC AND DILUTED EARNINGS PER SHARE DATA:
Income before gains on sales of real
estate investments and extraordinary item..... $0.56 $0.65 $0.61 $0.59 $0.70
Net income....................................... 0.75 0.72 0.61 0.92 0.70
Cash dividends paid.............................. 1.12 1.12 1.12 1.12 1.12
Weighted average number
of shares outstanding -Basic.................. 17,144,674 17,055,496 16,861,324 16,682,675 16,548,198
Weighted average number
of shares outstanding -Diluted................ 17,158,292 17,068,701 16,861,324 16,690,498 16,552,476
BALANCE SHEET DATA:
Real estate properties (3)....................... $392,470 $384,550 $395,800 $389,094 $345,088
Total assets..................................... 337,521 339,629 344,571 347,172 309,345
Fixed-rate debt.................................. 124,766 111,207 114,609 116,961 67,500
Bank Line........................................ 19,100 32,250 29,250 23,645 33,244
Shareholders' equity............................. 186,249 191,948 196,799 202,684 204,938
</TABLE>
(1) Revenues comprise minimum rents, percentage rents, recoveries from
tenants and other income.
(2) The Company considers 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. For a further discussion of FFO,
please refer to Management's Discussion and Analysis on page 21.
(3) Real estate properties reflect acquisition costs and capitalized costs
of improvements before deduction of depreciation and amortization. Real
estate properties do not include properties held for sale. As of
December 31, 1997, the Company owned three properties that are held for
sale with an aggregate book value (before depreciation) of $5,382,000.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
(Amounts in thousands, except share, percentage and per square foot information)
INTRODUCTION
The following discussion and analysis of the consolidated financial condition
and results of operations of Western Investment Real Estate Trust (the
Company) should be read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this report on Form 10-K.
Historical results and percentage relationships set forth herein are not
necessarily indicative of future operations.
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
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
Net cash provided by operating activities was $23,145, $21,956 and $20,203,
for the years ended December 31, 1997, 1996 and 1995, respectively.
Net cash used in investing activities was $3,740 for the year ended December
31, 1997. Included in this net amount are funds escrowed pending property
acquisitions ($7,117), funds invested in improvements to real estate
($5,491), and a mortgage note receivable ($1,300). These investments were
funded substantially with $10,135 of proceeds from the sale of five
properties.
Net cash used in financing activities was $18,894 for the year ended December
31, 1997. The principal use of these funds was for the redemption of the
Company's 8% Convertible Debentures of $61,310 and a net paydown of the
Company's unsecured bank line of credit (Bank Line) of $13,150. The primary
source of these funds was the net proceeds from the Company's 1997 Senior
Notes offering of $74,145. Dividends paid in 1997 of $19,207 were funded from
operating cash flows of $23,145.
19
<PAGE>
FINANCINGS - DEBT TRANSACTIONS
1997 SENIOR NOTES AND REDEMPTION OF THE CONVERTIBLE DEBENTURES - On September
25, 1997, the Company completed the sale of $75,000 of Senior Notes,
comprising $25,000 of 7.10% Notes due 2006, $25,000 of 7.20% Notes due 2008,
and $25,000 of 7.30% notes due 2010. The Notes were issued under the
Company's $150,000 shelf registration. The outstanding balance under the Bank
Line was paid off using a portion of the proceeds from the September 1997
sales of Senior Notes. On October 27, 1997, following a 30-day notification
period, the $60,500 remaining balance of Convertible Debentures was redeemed
using cash and cash equivalents as well as an advance on the Bank Line. The
Company recognized an extraordinary loss of $1,620 from the redemption of the
Convertible Debentures as a result of the write-off of the related
unamortized deferred debt issuance costs.
BANK LINE OF CREDIT - On August 8, 1997, the Company's Bank Line was amended
to extend the maturity date to June 30, 2000. Previously, the maturity date
on the Bank Line was May 31, 1998. On December 31, 1997, the Bank Line was
increased from $45,000 to $55,000. The purpose of the Bank Line is to provide
working capital to facilitate the funding of short-term operating cash needs
of the Company including property acquisitions. The Bank Line bears interest
at the London Interbank Offered Rate (LIBOR) plus 1.22%. At December 31,
1997, the balance outstanding was $19,100. The Company intends to renew or
replace this facility when it expires on June 30, 2000.
As of December 31, 1997, the Company's aggregate outstanding indebtedness of
$143,866 consisted of $124,766 in fixed-rate, long-term Senior Notes and
$19,100 of borrowings under the Company's variable-rate Bank Line. Any
incurrence of debt by the Company, in excess of the Bank Line of $55,000 and
the above-mentioned Senior Notes, would be subject to limitations imposed
under the Company's Senior Notes and Bank Line.
The Company's ratio of debt to undepreciated cost of real estate on December
31, 1997 was 36%. The Company's ratio of debt to total market capitalization
[defined as the total of debt plus the Bank Line divided by the sum of: (a) the
aggregate market value of the outstanding shares of beneficial interest and
(b) the total debt plus the Bank Line of the Company] on December 31, 1997
was 38%.
As of December 31, 1997, the Company has no debt that is secured by mortgages
on its properties. However, if amounts due under the Bank Line are not paid
at maturity, the lender, at its option, can require the Company to provide
security interests in Company properties. The Company has an ownership
interest in two properties where the co-owner is obligated under a note that
is secured by the property.
The Company anticipates that cash flows provided by operations will continue
to provide adequate funds for all current principal and interest payments as
well as dividend payments required to maintain its status as a real estate
investment trust under the Internal Revenue Code. Cash on hand, proceeds from
the sale of properties held for sale and borrowings under the Bank Line, as
well as other debt and equity alternatives, are expected to provide the
necessary funds to achieve future growth.
20
<PAGE>
INCOME TAX STATUS AND TAXABILITY OF DIVIDENDS
The Company has elected to be taxed as a real estate investment trust under
the applicable provisions of the Internal Revenue Code and the comparable
California statutes. Under such provisions, the Company will not be taxed on
that portion of its taxable income currently distributed to shareholders,
provided that at least 95% of its real estate investment trust taxable income
is so distributed. Management believes that the Company has qualified, and
will continue to qualify, for tax purposes as a real estate investment trust.
As the Company intends to distribute at least 95% of its taxable income, no
provision is required to be made for federal or state income taxes in the
accompanying financial statements.
Federal taxable income of the Company prior to the dividend-paid deductions
for the three years ended December 31, was: $14,327 in 1997; $16,187 in 1996;
and $12,220 in 1995. The difference between net income for financial
reporting purposes and taxable income results primarily from different
methods of accounting for leases, depreciation of investment properties and
gains on property dispositions.
The table below summarizes the taxability of distributions and dividends paid
during the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ordinary income................... 67.5% 80.2% 67.1%
Return of capital................. 23.2% 12.6% 32.6%
Capital gains..................... 9.3% 7.2% 0.3%
---------------------------------------------------
Total............................. 100.0% 100.0% 100.0%
---------------------------------------------------
---------------------------------------------------
</TABLE>
No assurances can be made that future dividends and distributions will be
treated similarly. Each holder of stock may have a different basis in its
stock and accordingly, each holder is advised to consult its tax advisors.
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, has considered presentation of operating results for
real estate companies that use historical cost accounting to be less than
fully informative.
21
<PAGE>
The National Association of Real Estate Investment Trusts (NAREIT) defines
FFO 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 REITs may not be comparable to the
Company's calculation of FFO.
The table below provides a reconciliation of net income in accordance with
GAAP to FFO as calculated under the NAREIT 1995 guidelines for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income......................................................... $12,880 $12,231 $10,304
Less: Gains on sales of real estate investments................. (4,898) (1,115) (47)
Plus: Real property depreciation................................ 9,799 9,886 9,817
Amortization of tenant improvement costs.................. 826 836 631
Amortization of leasing commission costs.................. 323 436 312
Loss on early extinguishment of debt...................... 1,620 --- ---
Management restructuring charge .......................... 1,842 --- ---
----------------------------------------------------
Funds From Operations.............................................. $22,392 $22,274 $21,017
----------------------------------------------------
----------------------------------------------------
</TABLE>
The payout ratio for the years ended December 31, 1997, 1996 and 1995
(calculated as dividend distributions made by the Company for the applicable
period divided by FFO), was 86%, 86% and 90%, respectively.
FFO increased $118 to $22,392 in 1997 from $22,274 in 1996. During 1996, FFO
increased $1,257 to $22,274, from the 1995 figure of $21,017 million. The
1996 increase of 6% is primarily the result of increased revenues and, to a
lesser extent, reduced operating expenses.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income increased $649 to $12,880, or $0.75 per share (calculated using
both basic and fully diluted weighted average shares outstanding), in 1997,
from $12,231, or $0.72 per share (calculated using both basic and fully
diluted weighted average shares outstanding), in 1996. This 5% increase in
net income is principally due to the 1997 gains of $4,898 realized from the
sale of five properties, partially offset by a $1,842 management
restructuring charge and a $1,620 extraordinary loss resulting from the early
extinguishment of debt. Other contributing factors to the increase include
decreased other operating expenses and increased other income partially
offset by decreased minimum rents and increased interest expense.
22
<PAGE>
The Company continually assesses its portfolio for possible dispositions of
properties that no longer fit its investment criteria due to limited
prospects of growth in income, property type or other reasons. The properties
sold in 1997 were three single-tenant retail properties, one multi-tenant
retail property that was part of a large mixed-use center, and one small
commercial property.
As part of the 1997 management restructuring, participants of the Trustee
Emeritus and Death and Disability Program have terminated their participation
in this program. The significant portion of the management restructuring
charge relates to this participation termination.
The early extinguishment loss results from the write-off of deferred debt
issuance costs relating to the October 1997 redemption of Convertible
Debentures.
Other operating expenses decreased $470 to $3,011 in 1997 from $3,481 in
1996. The most significant factor in this 14% decrease is a reduction in
leasing and property management expenses.
Other income increased $305 to $1,061 in 1997 from $756 in 1996, primarily
due to the interest earned on short-term investment of a portion of the 1997
Senior Note sales proceeds until the Convertible Debentures were redeemed.
Redemption occurred following a 30-day notification period to holders of the
Convertible Debentures.
Minimum rents decreased $396 to $37,845 in 1997 from $38,241 in 1996. This
decrease primarily reflects the vacancy of the Petaluma property. The average
occupancy for all property types at December 31, 1997 was 92.2% as compared
with the December 31, 1996 percentage of 93.7%.
Interest expense increased $222 to $11,511 in 1997 from $11,289 in 1996,
primarily as a result of increased borrowings during the 30-day notification
period prior to redeeming the Convertible Debentures, partially offset by
reduced borrowings under the Bank Line and reduced interest rates.
The following table provides information on interest costs for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest incurred....................................... $11,523 $11,417 $11,566
Interest capitalized.................................... 12 128 29
------------------------------------------------
Interest expense........................................ $11,511 $11,289 $11,537
------------------------------------------------
------------------------------------------------
Interest paid........................................... $9,714 $11,217 $11,030
------------------------------------------------
------------------------------------------------
Weighted average interest rate on Bank Line............. 7.27% 7.33% 7.91%
</TABLE>
23
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income increased $1,927 to $12,231, or $0.72 per share (calculated using
both basic and fully diluted weighted average shares outstanding), in 1996,
from $10,304, or $0.61 per share (calculated using both basic and fully
diluted weighted average shares outstanding), in 1995. This 19% increase in
net income is principally due to the 1996 gains of $1,115 realized from the
sale of two single-tenant retail properties and one parcel of land.
Additionally, the increase results from increased minimum rents and other
income as well as decreased interest expense and other operating expenses.
Minimum rents increased $600 to $38,241 in 1996 from $37,641 in 1995. This
increase represents approximately 2% over the 1995 figure. The average
occupancy for all property types at December 31, 1996 was 93.7% as compared
with the December 31, 1995 percentage of 93.9%.
Other income increased $172, or 29%, to $756 in 1996 from $584 in 1995. This
increase is primarily the result of: (i) the $75 gain recorded on the sale of
marketable securities held by the Company, and (ii) increased lease
termination income of $60.
Interest expense decreased $248, or 2%, from the 1995 figure of $11,537 to
$11,289 in 1996. The main factors contributing to this decrease are: (i) the
redemption of $2,250 of 8% Convertible Debentures during the year, and (ii)
the decreased interest rate on the Bank Line.
Other operating expenses decreased $121 to $3,481 in 1996 from $3,602 in
1995. This 3% decrease is primarily due to decreased spending for
"additional" marketing funds. Additional marketing funds are in excess of the
Company's contractually obligated contributions. Historically, certain
shopping centers were targeted to benefit from these additional marketing
funds until the shopping center obtained stabilization.
INFLATION
Substantially all of the Company's leases with tenants contain provisions
that somewhat mitigate the impact of inflation. These provisions include, but
are not limited to, clauses providing for increases in base rent and clauses
enabling the Company to receive percentage rent based on tenants' gross
sales. Additionally, substantially all leases require the tenant to pay their
proportionate share of operating expenses, including common area maintenance
and real estate taxes, thereby reducing the Company's exposure to increased
costs and operating expenses resulting from inflation.
Increases in interest rates could increase the Company's borrowing costs. As
of December 31, 1997, the Company had $19,100 outstanding under its unsecured
variable-rate Bank Line. This amount represents approximately 13% of the
Company's total liabilities and approximately 5% of the Company's historical
cost of real estate owned.
24
<PAGE>
COMPUTER SYSTEMS AND THE MILLENNIUM
As a result of computer programs being written using two digits (rather than
four digits) to define the applicable year, many computer systems will not be
able to process information beyond December 31, 1999. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. At December 31, 1997, a significant
portion of the Company's Local Area Network and Wide Area Network are year
2000 compliant.
The Company is currently evaluating appropriate courses of action, including
replacement of certain computer systems, to upgrade its management
information hardware and software to meet its current and anticipated future
growth requirements. The Company expects to spend approximately $300 by the
end of 1998 to acquire a new computer information system that will support
planned future growth, increase efficiencies relating to Property Operations.
These costs will be recorded as assets and amortized.
Additionally, the Company has commenced a survey of its key tenants, vendors,
banks and other parties the Company has significant business dealings with to
determine if reliance on these external sources could interrupt Company
operations. The Company expects to complete this survey and take corrective
action by year-end 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market capitalization of the Company on January 28, 1997 was less than
$2.5 billion. As such, the Company will include the information required by
Item 7A in the December 31, 1998 year-end filing with the Commission,
pursuant to General Instruction 1 to Item 305 of Regulation S-K.
25
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
Financial Statements
and
Financial Statement Schedule
Form 10-K Item 8
December 31, 1997
26
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 28
Balance Sheets - December 31, 1997 and 1996 29
Statements of Income - For the Years Ended
December 31, 1997, 1996 and 1995 30
Statements of Shareholders' Equity - For the Years Ended
December 31, 1997, 1996 and 1995 31
Statements of Cash Flows - For the Years Ended
December 31, 1997, 1996 and 1995 32
Notes to Financial Statements 33-45
Financial Statement Schedule III: Real Estate and
Accumulated Depreciation 46-47
</TABLE>
27
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders
Western Investment Real Estate Trust:
We have audited the financial statements of Western Investment Real Estate
Trust (a California real estate investment trust) as listed in the
accompanying index. In connection with our audit of the financial statements,
we have also audited the financial statement schedule listed in the
accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Western Investment Real
Estate Trust as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
San Francisco, California
January 29, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------------------------------------------
December 31,
ASSETS 1997 1996
--------------------------------------------------
(In thousands)
<S> <C> <C>
Real estate investments:
Real estate properties....................................................... $392,470 $384,550
Less accumulated depreciation and amortization............................... (77,642) (66,271)
----------- -----------
314,828 318,279
Real estate properties held for sale......................................... 5,382 16,161
Less accumulated depreciation and amortization............................... (1,861) (5,525)
------------ ------------
3,521 10,636
----------- ----------
Net real estate investments............................................... 318,349 328,915
Cash and cash equivalents....................................................... 1,463 952
Accounts receivable, acquisition deposits, and other assets..................... 16,636 7,551
Deferred debt issuance costs, net............................................... 1,073 2,211
----------- -----------
$337,521 $339,629
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank line....................................................................... $ 19,100 $32,250
Convertible debentures (note 7)................................................. --- 61,310
Senior notes, net (note 7)...................................................... 124,766 49,897
--------- ----------
143,866 143,457
Interest payable................................................................ 2,917 1,477
Prepaid rents and security deposits............................................. 1,428 1,554
Other liabilities............................................................... 3,061 1,193
----------- ------------
Total liabilities............................................................ 151,272 147,681
--------- ----------
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:
December 31, 1997 - 17,191,860 shares;
December 31, 1996 - 17,138,432 shares..................................... 242,682 242,054
Accumulated dividends in excess of net income................................ (56,433) (50,106)
----------- -----------
Commitments and contingencies (notes 4, 7 and 14)
Total shareholders' equity................................................... 186,249 191,948
--------- ---------
$337,521 $339,629
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------
1997 1996 1995
------------------ ---------------- ----------------
(In thousands, except per share and share data)
<S> <C> <C> <C>
REVENUES:
Minimum rents....................................................... $37,845 $38,241 $37,641
Percentage rents.................................................... 552 649 559
Recoveries from tenants............................................. 8,093 8,143 7,506
Other income........................................................ 1,061 756 584
------- ------- ------
Total revenues......................................................... 47,551 47,789 46,290
------- ------- ------
EXPENSES:
Interest............................................................ 11,511 11,289 11,537
Property operating costs............................................ 8,798 8,933 8,310
Depreciation and amortization....................................... 11,046 11,264 10,893
Other operating expenses............................................ 3,011 3,481 3,602
General and administrative.......................................... 1,741 1,706 1,691
Management restructuring charge..................................... 1,842 --- ---
------- ------- ------
Total expenses......................................................... 37,949 36,673 36,033
------- ------- ------
Income before gains on sales of real estate
investments and extraordinary item............................... 9,602 11,116 10,257
Gains on sales of real estate investments........................... 4,898 1,115 47
------- ------- ------
Income before extraordinary item.................................... 14,500 12,231 10,304
Extraordinary item - loss on early extinguishment of debt........... (1,620) --- ---
------- ------- ------
Net income.......................................................... $12,880 $12,231 $10,304
------- ------- ------
------- ------- ------
Basic and diluted earnings per share data:
Income before gains on sales of real estate
investments and extraordinary item............................... $ 0.56 $ 0.65 $ 0.61
------- ------- ------
------- ------- ------
Gains on sales of real estate investments........................... $ 0.28 $ 0.07 $ -0-
------- ------- ------
------- ------- ------
Income before extraordinary item.................................... $ 0.84 $ 0.72 $ 0.61
------- ------- ------
------- ------- ------
Extraordinary item - loss on early extinguishment of debt........... $(0.09) $ -0- $ -0-
------- ------- ------
------- ------- ------
Net income.......................................................... $ 0.75 $ 0.72 $ 0.61
------- ------- ------
------- ------- ------
Cash dividends paid.................................................... $ 1.12 $ 1.12 $ 1.12
------- ------- ------
------- ------- ------
Weighted average number of shares outstanding-Basic.................... 17,144,674 17,055,496 16,861,324
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares outstanding-Diluted.................. 17,158,292 17,068,701 16,861,324
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997, 1996 and 1995
(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, 1995............................. 16,734,532 $237,341 $(34,657) $202,684
Net proceeds from issuance of shares................. 43,575 514 --- 514
Debenture redemptions................................ 194,389 2,179 --- 2,179
Net income........................................... --- --- 10,304 10,304
Cash dividends paid.................................. --- --- (18,882) (18,882)
---------------- -------------- ---------- -----------
Balance, December 31, 1995 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................. 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
---------------- -------------- ---------- -----------
---------------- -------------- ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS WESTERN INVESTMENT REAL ESTATE TRUST
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------
1997 1996 1995
----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 12,880 $ 12,231 $ 10,304
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................... 11,046 11,264 10,893
Amortization of deferred debt issuance costs..................... 369 365 391
Gains on sales of real estate investments........................ (4,898) (1,115) (47)
Loss on early extinguishment of debt............................. 1,620 --- ---
Increase in accounts receivable and other assets................. (550) (279) (304)
Increase in deferred rent receivable............................. (471) (797) (1,065)
(Increase) decrease in interest payable.......................... 1,440 (164) 144
Increase (decrease) in prepaid rents,
security deposits and other liabilities....................... 1,709 451 (113)
--------- -------- ---------
Net cash provided by operating activities........................ 23,145 21,956 20,203
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of real estate investments...................... 10,135 1,371 168
Proceeds from sale of marketable securities......................... --- 234 ---
Investment in mortgage note receivable.............................. (1,300) --- ---
(Acquisitions) recovery of acquisition costs of real estate
investments...................................................... (283) 36 (3,278)
Funds escrowed pending acquisition.................................. (7,117) --- (168)
Improvements of real estate investments:
Build-to-suit developments....................................... (1,561) (4,239) (1,056)
New leases....................................................... (3,264) (1,707) (2,544)
General.......................................................... (666) (192) (676)
Recovery of investment in direct financing leases................... 316 272 236
--------- -------- ---------
Net cash used in investing activities............................ (3,740) (4,225) (7,318)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank line............................................... 50,050 40,468 39,650
Principal payments on bank line..................................... (63,200) (37,468) (34,045)
Principal payments on real estate loan payable...................... --- (1,294) (68)
Redemption of convertible debentures................................ (61,310) (40) (45)
Net proceeds from issuance of shares................................ 628 --- 514
Net proceeds from senior notes offering............................. 74,145 --- ---
Cash dividends paid................................................. (19,207) (19,102) (18,882)
--------- -------- ---------
Net cash used in financing activities............................ (18,894) (17,436) (12,876)
--------- -------- ---------
Net increase in cash and cash equivalents........................ 511 295 9
Cash and cash equivalents, at beginning of period...................... 952 657 648
--------- -------- ---------
Cash and cash equivalents, at end of period............................ $ 1,463 $ 952 $ 657
--------- -------- ---------
--------- -------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............................. $ 9,714 $ 11,217 $ 11,030
-------- --------- ---------
-------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share, percentage and per square foot information)
Note 1: ORGANIZATION AND BASIS OF PRESENTATION AND RECENT ACCOUNTING
PROUNCEMENTS
(A) Description of Organization
Founded in 1962, Western Investment Real Estate Trust (The Company) 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 December 31, 1997, the
Company's real estate portfolio comprised 53 properties, 42 of which were
retail properties.
(B) Basis of Presentation and Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain prior year financial statement amounts and related footnote
information have been reclassified to conform with the current year
presentation.
(C) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued FASB No.
130, "REPORTING COMPREHENSIVE INCOME" and FASB No. 131, "DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." These statements are
effective for periods beginning after December 15, 1997; as such, the Company
will adopt FASB 130 and 131 during the first quarter of 1998. For the year
ended December 31, 1997 and 1996, the effect of applying these statements
would not have been material.
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE INVESTMENTS
Properties comprising real estate investments are carried at the lower of
depreciated cost or fair value. Acquisition and development costs, which
include fees and costs incurred in acquiring or developing new properties,
are capitalized as incurred. Upon completion of acquisition or construction,
these costs are depreciated over the useful lives of the respective
properties on a straight-line basis. The estimated useful lives for these
properties range from 20 to 45 years for buildings and 2 to 31 years for
improvements.
F-6
<PAGE>
The Company has adopted FASB No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." Accordingly,
in the normal course of the Company's business, when it determines that a
property should be disposed of, the Company will discontinue the periodic
depreciation of that property. Additionally, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the recoverability of the carrying value of that property is
evaluated. If the sum of the undiscounted, expected future cash flows,
exclusive of interest, is less than the carrying value of that asset, a
determination of fair value of that asset is made. If the fair value is less
than the carrying value of that asset, an impairment charge is recognized. No
impairment losses have been recorded in the years ended December 31, 1997,
1996 or 1995.
Included in real estate investments are net investments in two direct
financing leases. The net investment comprises the aggregate minimum lease
payments to be received over the terms of the leases, plus an estimated
residual value, less unearned income.
Expenditures for ordinary maintenance and repairs are expensed as incurred.
Significant renovations and improvements that enhance and/or extend the
useful life of the property are capitalized and depreciated over its
estimated useful life.
LEASING COMMISSIONS AND LEASING-RELATED COSTS
Direct, incremental leasing commissions and leasing related costs are
capitalized and amortized over the respective terms of the associated leases.
The following table provides a reconciliation of leasing commissions and
leasing-related costs:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year...................... $1,587 $1,673 $1,484
Additions..................................... 366 350 501
Amortization.................................. (323) (436) (312)
--------------------------------------------------------------------
Balance at end of year............................ $1,630 $1,587 $1,673
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
RENTAL INCOME
The Company accrues base rental income (minimum contractual lease payments)
as earned. Certain of the Company's leases provide for additional rent based
on specified percentages of the lessee's revenues. Such percentage-based
rental income is recognized during the year based on estimates. The Company
recognizes income from deferred rental receivables in accordance with FASB
No. 13, "ACCOUNTING FOR LEASES." Deferred rent receivable recognized as
income was $471 in 1997, $797 in 1996 and $1,065 in 1995.
CASH EQUIVALENTS
Cash equivalents comprise certain highly liquid investments with original
maturities of less than three months.
F-7
<PAGE>
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs comprise the costs incurred in connection with
the issuance of debt. These costs are amortized over the term of the
associated debt instruments.
Note 3: REAL ESTATE INVESTMENTS
The following table provides a reconciliation of real estate properties,
properties held for sale and the related accumulated depreciation and
amortization for each:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE PROPERTIES:
Balance at beginning of year........................................ $384,550 $395,800 $389,094
Increases: Acquisitions ........................................ 288 --- 3,278
Improvements......................................... 4,878 5,788 3,775
Properties reclassified from held for sale........... 3,070 --- ---
Decreases: Properties reclassified as held for sale............. --- (16,161) ---
Dispositions......................................... --- (569) (111)
Recovery of acquisition costs........................ --- (36) ---
Amortization of direct financing leases.............. (316) (272) (236)
--------- -------- --------
Balance at end of year.............................................. $392,470 $384,550 $395,800
--------- -------- --------
--------- -------- --------
Accumulated depreciation and amortization:
Balance at beginning of year........................................ $ 66,271 $ 61,249 $ 50,802
Increases: Additions charged to operations...................... 10,625 10,722 10,447
Accumulated depreciation of properties
reclassified from held for sale..................... 746 --- ---
Decreases: Dispositions......................................... --- (175) ---
Accumulated depreciation of properties
held for sale....................................... --- (5,525) ---
--------- -------- --------
Balance at end of year.............................................. $ 77,642 $ 66,271 $ 61,249
--------- -------- --------
--------- -------- --------
REAL ESTATE PROPERTIES HELD FOR SALE:
Balance at beginning of year........................................ $ 16,161 $ -0- $ -0-
Increases: Improvements......................................... 29 --- ---
Properties reclassified as held for sale............. -- 16,161 ---
Decreases: Properties removed from market....................... (3,070) --- ---
Dispositions......................................... (7,738) --- ---
--------- -------- --------
Balance at end of year.............................................. $ 5,382 $ 16,161 $ -0-
--------- -------- --------
--------- -------- --------
Accumulated depreciation and amortization:
Balance at beginning of year........................................ $ 5,525 $ -0- $ -0-
Increases: Accumulated depreciation of properties
reclassified as held for sale....................... --- 5,525 ---
Decreases: Accumulated depreciation of properties
removed from market................................. (746) --- ---
Dispositions......................................... (2,918) --- ---
--------- -------- --------
Balance at end of year.............................................. $ 1,861 $ 5,525 $ -0-
--------- -------- --------
--------- -------- --------
</TABLE>
F-8
<PAGE>
At December 31, 1997, the Company owned three properties that were held for
sale. These properties total 91,000 leasable square feet and have a net
aggregate carrying value of $3,521. During the year ended December 31, 1997,
Management changed its intention to dispose of two properties. Subsequently,
these properties were removed from the "held for sale" classification.
As of December 31, 1997, the Company had no debt that is secured by mortgages
on its properties. However, if amounts due under the Bank Line are not paid
at maturity, the lender, at its option, can require the Company to provide
security interests in Company properties. The Company has an ownership
interest in two properties where the co-owner is obligated under a note that
is secured by the property.
Most of the Company's leases require the tenant to be responsible for, or
reimburse the Company for liability insurance coverage on the properties. The
Company maintains umbrella liability insurance on all of its properties and
monitors tenant compliance with liability insurance coverage requirements.
While the Company believes its properties are adequately insured, the Company
does not carry earthquake, flood or pollution coverage. However, most major
anchor tenants are required to rebuild or repair their leased premises if
damaged or destroyed, regardless of the cause. Most of the Company's
properties are located in areas of California and Nevada where earthquakes
have been known to occur. In the event of a major earthquake, Company
properties could suffer substantial damage or destruction. Since it commenced
real estate operations in 1964, the Company has not incurred any material
expense nor, to its knowledge, have any of its properties incurred any
material damage from earthquakes or floods.
The Company periodically considers the merits of purchasing earthquake
insurance. To date the Company has not purchased earthquake insurance because
of: (i) the high premiums and deductibles and (ii) the Company's
geographically diversified portfolio that reduces the likelihood of material
loss as a consequence of earthquakes. Furthermore, the majority of properties
in the portfolio principally consist of relatively new, single-story
buildings.
F-9
<PAGE>
Note 4: CAPITAL EXPENDITURES
It is the Company's practice to capitalize costs which exceed $4 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 twelve months ended December 31, 1997, and 1996
are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
-------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
"Build to Suit" capital improvements............................... $1,561 $4,239
Capitalized costs incurred in connection with leasing previously
UNLEASED space................................................. 142 169
Capitalized costs incurred in connection with leasing previously
LEASED space................................................... 3,122 1,538
Capitalized costs which relate to improvements to common
areas.......................................................... 666 192
------ ------
Total capitalized expenditures..................................... $5,491 $6,138
------ ------
------ ------
Improvements....................................................... $4,907 $5,788
Leasing-related costs.............................................. 584 350
------ ------
Total capitalized expenditures................................. $5,491 $6,138
------ ------
------ ------
</TABLE>
During the year ended December 31, 1997, the Company entered into new leases
that obligate the Company to fund leasing commissions, tenant improvements
and build-to-suit developments. These obligations relate both to new leases
and lease renewals, a portion of which were funded during 1997 and are
reflected in the preceding table. In addition, a portion remains an
obligation of the Company at December 31, 1997.
F-10
<PAGE>
The aggregate and per square foot information is as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW LEASES
Tenant Leasing
Build to Suit Improvements Commissions
------------- ------------ -----------
Per Per Per
Aggregate Square Aggregate Square Aggregate Square
Property Type Amount Foot Amount Foot Amount Foot
------------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <S>
Shopping Centers and
Retail Properties $1,423 $114.38 $1,658 $11.22 $387 $2.56
Commercial --- --- --- --- --- ---
Industrial --- --- 13 $ 0.65 32 $1.58
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RENEWAL LEASES
Tenant Leasing
Improvements Commissions
------------ -----------
Per Per
Aggregate Square Aggregate Square
Property Type Amount Foot Amount Foot
------------- --------- ------ --------- ------
<S> <C> <C> <C> <C>
Shopping Centers &
Retail Properties $53 $3.77 $49 $1.07
Commercial --- --- --- ---
Industrial --- --- --- ---
</TABLE>
- --------------------------------------------------------------------------------
Note 5: LEASES
Future minimum lease payments scheduled to be received under operating leases
that have initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 36,695
1999 34,127
2000 31,605
2001 28,126
2002 25,859
Thereafter 212,811
--------
Total $369,223
--------
--------
</TABLE>
F-11
<PAGE>
Future minimum lease payments scheduled to be received under direct financing
leases that have initial or remaining noncancelable lease terms in excess of
one year as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 469
1999 212
2000 189
2001 189
2002 189
Thereafter 142
------
Total $1,390
------
------
</TABLE>
At December 31, 1997, the Company's investment in direct financing leases was
$1,481, and was calculated by adding the estimated residual value of $383 to
the total remaining minimum lease payments of $1,390, less unearned income of
$292. The original cost of the properties subject to these direct financing
leases is $4,449. Included in other income is income recorded under direct
financing leases of $155, $197 and $233 in 1997, 1996 and 1995, respectively.
Note 6: MAJOR TENANT
Total revenues attributable to leases with Raley's, a grocery and drug
retailer, the Company's most significant tenant, were $9,178, $9,382 and
$9,009 in 1997, 1996 and 1995, respectively. These amounts represented 19%,
20% and 20% of total revenues during 1997, 1996 and 1995, respectively.
Note 7: NOTES PAYABLE
BANK LINE OF CREDIT
At December 31, 1997, the Company had $19,100 outstanding under its $55,000
unsecured bank line of credit (the Bank Line). Interest on funds drawn under
the Bank Line is LIBOR plus 1.22% and is payable monthly on any outstanding
balance. In addition, the Company pays an annual fee of one quarter of one
percent (.25%) of the total commitment. The Company is not required to pledge
any assets or maintain compensating balances for this line of credit,
although the Company has agreed to certain covenants that impose limitations
on the incurrence of debt and other restrictions. Additionally, if amounts
due under the line of credit are not paid at maturity, the lender, at its
option, can require the Company to provide security interests in Company
properties. The Company intends to renew or replace this facility before it
expires on June 30, 2000.
CONVERTIBLE DEBENTURES
In 1988, the Company issued $75,000 of 8% Convertible Debentures due in 2008.
On October 27, 1997, following a 30-day notification period, the Company's 8%
Convertible Debentures, with a $60,500 principal balance, were redeemed using
cash and cash equivalents as well as an advance on the Bank Line. The Company
recognized an extraordinary loss of $1,620 from the extinguishment of the
Convertible Debentures as a result of the write-off of the related
unamortized deferred debt issuance costs.
F-12
<PAGE>
SENIOR NOTES
In February 1994, the Company sold $50,000 of unsecured Senior Notes (the
1994 Notes) in a public offering. The 1994 Notes are due in 2004 and contain
certain covenants that impose limitations on the incurrence of debt and other
restrictions. These restrictions include a cap on total borrowings, minimum
shareholders' equity and income-coverage requirements. The 1994 Notes are not
redeemable prior to maturity.
In September 1997, the Company sold $75,000 of unsecured Senior Notes (the
1997 Notes) in a public offering, comprising $25,000 due 2006, $25,000 due
2008 and $25,000 due 2010. The 1997 Notes were issued under the Company's
$150,000 shelf registration. The outstanding balance under the Bank Line was
paid off using a portion of the proceeds from the sale of the 1997 Notes. On
October 27, 1997, the $60,500 principal balance of Convertible Debentures was
redeemed using cash and cash equivalents as well as an advance on the Bank
Line.
All Senior Notes outstanding at December 31, 1997 are summarized in the
following table:
<TABLE>
<CAPTION>
Net Amount Coupon Interest Rate Due Date Years to Maturity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 49,911 7.875% February 15, 2004 6
24,966 7.100% September 15, 2006 9
24,943 7.200% September 15, 2008 11
24,946 7.300% September 15, 2010 13
---------
Total/Weighted
Average $ 124,766 7.470% 9
--------- ------ --
--------- ------ --
</TABLE>
As of December 31, 1997, the Senior Notes carried "investment grade" ratings
from Moody's Investor Service (Baa3) and Standard & Poor's (BBB-).
Note 8: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB No. 107 requires disclosure about fair value for all financial
instruments. The Company believes that the carrying amount approximates fair
value for cash and cash equivalents, the Bank Line, and prepaid rents and
security deposits. The fair value of the Company's Convertible Debentures and
Senior Notes are based on quoted market prices.
The estimated fair values of the Company's financial instruments as of
December 31 are stated in the following table:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................ $ 1,463 $ 1,463 $ 952 $ 952
Bank line ........................................... $19,100 $19,100 $32,250 $32,250
Convertible debentures .............................. --- --- 61,310 61,310
Senior notes ........................................ 124,766 125,848 49,897 50,938
Prepaid rents and security deposits.................. 1,428 1,428 1,554 1,554
</TABLE>
F-13
<PAGE>
Note 9: MANAGEMENT RESTRUCTURING CHARGE
During the fourth quarter of 1997, the Company recorded a $1,842 management
restructuring charge as a result of changes in management and related
compensation arrangements. This non-recurring management restructuring charge
of $1,842 principally relates to agreements the Company entered into whereby
three individuals agreed to withdraw from the Company's Trustee Emeritus
Program and the Death and Disability Program (collectively the Programs). In
exchange for agreeing to withdraw from these Programs and relieving the
Company and the Program participants from their respective obligations under
the Programs, the three individuals will receive annual payments of $60 from
the Company for as long as each individual or his eligible spouse lives. The
obligation was calculated using a 7% discount rate.
Note 10: STOCK OPTION PLAN
In May 1988, the Company instituted a non-qualified stock option plan (the
Plan). The purchase price of shares of beneficial interest purchased pursuant
to this Plan is to be not less than the fair market value of the shares on
the date of grant. Options granted under the Plan, which expire six years
from the grant date if not exercised, vest and become exercisable at a rate
of 20% per year from the date of grant until completely vested. A total of
300,000 shares of beneficial interest have been authorized under the Plan.
Activity in the Company's share option plan during the three years ended
December 31, 1997, is summarized in the following table:
<TABLE>
<CAPTION>
Shares Available Options Weighted
for Future Granted and Average
Options Grants Outstanding Exercise Price
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
12/31/94, Balance 38,840 261,000 $13.54
- ---------------------------------------------------------------------------------------------------------------------
Exercised --- --- ---
Expired 45,000 (45,000) $17.07
Granted (33,000) 33,000 $11.00
- ---------------------------------------------------------------------------------------------------------------------
12/31/95, Balance 50,840 249,000 $12.57
- ---------------------------------------------------------------------------------------------------------------------
Exercised --- --- ---
Expired 6,000 (6,000) $11.66
Granted (29,000) 29,000 $13.31
- ---------------------------------------------------------------------------------------------------------------------
12/31/96, Balance 27,840 272,000 $12.67
- ---------------------------------------------------------------------------------------------------------------------
Exercised --- (53,160) $11.72
Expired 9,040 (9,040) $12.45
Granted (36,300) 36,300 $13.59
- ---------------------------------------------------------------------------------------------------------------------
12/31/97, BALANCE 580 246,100 $13.02
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
The following table summarizes information about the Company's fixed price
stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------ ----------------------------------
Number of Weighted Weighted Weighted
Options Average average average
Range of outstanding at Remaining exercise exercise
Exercise Prices December 31, 1997 Contractual life price Options price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11.00 - $13.81 246,100 3.28 years $13.02 121,000 $13.09
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted FASB No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," and has elected to continue to follow Accounting Principles
Board Opinion 25 to account for stock based compensation and to make the
disclosures set forth below as required by FASB No. 123. Consequently, the
Company has recorded no compensation costs related to its stock options
granted during 1997, 1996 and 1995.
The pro-forma effects on net income and net income per-share data as if the
Company had elected to use the fair value approach to account for its
employee stock-based compensation plans are as follows:
<TABLE>
<CAPTION>
YEAR ENDED Year ended Year ended
DECEMBER 31, 1997 December 31, 1996 December 31, 1995
---------------------------------------------------------------------------------------
As Adjusted As Adjusted As Adjusted
Reported Pro-Forma Reported Pro-Forma Reported Pro-Forma
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $12,880 $12,852 $12,231 $12,214 $10,304 $10,302
Per share net income $0.75 $0.75 $0.72 $0.72 $0.61 $0.61
</TABLE>
The weighted average fair value per option granted during the year ended
December 31, 1997, 1996 and 1995, was $1.58, $1.69 and $1.11, respectively.
The exercise price of options granted was the market price on the date of
grant. The following assumptions were used for the options granted in 1997,
1996 and 1995, respectively: risk-free interest rate of 5.86%, 6.05% and
5.80%; forfeiture rate, 8.6%, 7.4% and 6.2%; share-volatility rate, 21.1%,
21.9% and 22.7%; and dividend yield 8.18%, 8.37% and 10.30%.
Note 11: DIVIDEND REINVESTMENT PLAN
In accordance with the Dividend Reinvestment and Share Purchase Plan adopted
by the Company in 1990, $699 in dividend reinvestment proceeds were used to
purchase shares in the open market for shareholders during 1997.
During 1996, $706 in dividend reinvestment proceeds were used to purchase
shares in the open market for the shareholders.
F-15
<PAGE>
During 1995, the Company received $514 net of issuance costs and issued
43,575 shares of beneficial interest. Additionally, $184 in dividend
reinvestment proceeds were used to purchase shares in the open market for the
shareholders in 1995.
Note 12: EARNINGS PER SHARE
In February 1997, the FASB issued FASB No. 128, "EARNINGS PER SHARE." The
purpose of this pronouncement is to show the effect of the exercise of
certain options and other convertible securities on earnings per share. A
reconciliation of the denominator used in the calculation of "DILUTED
EARNINGS PER SHARE" for the year ended December 31, 1997, 1996 and 1995 is
shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding............................... 17,144,674 17,055,496 16,861,324
Plus: Options with exercise prices below year-end
market price of common stock ............................. 13,618 13,205 -0-
----------------------------------------------------
Adjusted weighted average shares outstanding...................... 17,158,292 17,068,701 16,861,324
</TABLE>
Additionally, during the years 1997, 1996 and 1995, the Company had
Convertible Debentures outstanding. The principal balance of all debentures
outstanding was redeemed during October 1997. The principal balance of the
debentures at December 31, 1996 and 1995 was $61,310 and $63,433,
respectively, and was convertible prior to maturity at a conversion price
equal to $22.23 per share. Hypothetical conversion of these debentures had
the effect of increasing earnings per share for 1997, 1996 and 1995, and as
such, conversion was not assumed in the above calculation.
F-16
<PAGE>
Note 13: QUARTERLY RESULTS OF OPERATIONS
The following is a summary of quarterly financial information for the last two
years:
<TABLE>
<CAPTION>
Quarters
Unaudited -------------------------------------------------------------
(In thousands, except per share and share data) First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
- ----
TOTAL REVENUES................................................ $11,141 $12,304 $11,506 $12,600
------- ------- ------- -------
------- ------- ------- -------
INCOME BEFORE GAINS ON SALES OF REAL
ESTATE INVESTMENTS AND EXTRAORDINARY ITEM.................. $ 2,789 $ 2,877 $ 2,966 $ 970
------- ------- ------- -------
------- ------- ------- -------
NET INCOME.................................................... $ 2,789 $ 4,037 $ 5,703 $ 351
------- ------- ------- -------
------- ------- ------- -------
BASIC AND DILUTED EARNINGS PER SHARE.......................... $0.16 $0.24 $0.33 $0.02
DIVIDENDS..................................................... $0.28 $0.28 $0.28 $0.28
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC....................... 17,138,432 17,138,432 17,139,075 17,162,553
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED..................... 17,146,080 17,162,114 17,157,978 17,176,171
1996
- ----
Total revenues................................................ $11,319 $12,222 $11,940 $12,308
------- ------- ------- -------
------- ------- ------- -------
Income before gains on sales of real
estate investments and extraordinary item.................. $ 2,816 $ 2,837 $ 2,711 $ 2,752
------- ------- ------- -------
------- ------- ------- -------
Net income.................................................... $ 2,816 $ 3,869 $ 2,794 $ 2,752
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted earnings per share.......................... $0.17 $0.23 $0.16 $0.16
Dividends..................................................... $0.28 $0.28 $0.28 $0.28
Weighted average number of shares-Basic....................... 16,972,496 16,972,496 17,136,774 17,138,432
Weighted average number of shares-Diluted..................... 16,972,867 16,986,322 17,146,182 17,151,637
</TABLE>
Note 14: COMMITMENTS AND CONTINGENCIES
The Company identifies and evaluates prospective investments on a continuous
basis. In connection therewith, the Company initiates letters of interest and
extends offers on a regular basis. At December 31, 1997, the Company was
committed to fund $34,950 of acquisitions.
As of December 31, 1997, the Company has entered into several new leases that
call for approximately $795 in future real estate improvements and leasing
commissions. The Company expects to pay these expenditures from operating
cash flows or from borrowings under the Bank Line.
The Company is routinely involved in various legal actions arising in the
normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that such outcomes
will not have a material adverse effect on the Company's financial statements.
F-17
<PAGE>
Investments in real property create a potential for environmental liability
on the part of the owner of such real property. If hazardous substances are
discovered on or emanating from any of the Company's properties, the Company
and/or others may be held strictly liable for all costs and liabilities
relating to the clean-up of such hazardous substances. The Company carries no
insurance coverage expressly for this type of environmental risk.
Note 15: SUBSEQUENT EVENTS
On January 21, 1998, the Company purchased a 214,770 square foot community
shopping center located in Modesto, California. The Company acquired this
property for $17,500. The Company used $7,117 in proceeds from the recent
sale of two properties, drawing on the Bank Line for additional funds.
In late January, 1998, the Company was in the final stages of negotiating a
126,500-square-foot neighborhood shopping center located in Windsor,
California. The Company will acquire this property for $20,930. This shopping
center will be purchased using funds drawn on the Bank Line and the
assumption of a $10,165 existing mortgage. This mortgage will have a fixed
interest rate of 7.61%, will be due 2004, and will amortize over 22 years.
The Company expects to close this purchase on February 9, 1998.
F-18
<PAGE>
<TABLE>
<CAPTION>
WESTERN INVESTMENT REAL ESTATE TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(DECEMBER 31, 1997
IN THOUSANDS EXCEPT FOR DATES ON CONSTRUCTION AND ACQUISITION AND DEPRECIABLE LIVES)
- -----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- -----------------------------------------------------------------------------------------------------------------
Cost capitalized/(sold)
Initial cost to company subsequent to acquisition
- -----------------------------------------------------------------------------------------------------------------
Buildings and
Property Name Encumbrances Land Improvements Land Improvements
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shopping Center/Retail
- ----------------------
Anderson Square, Anderson, CA 1,145 2,125 0 367
Angel's Camp Town Center, Angels Camp, CA 580 4,447 0 129
Skypark Plaza Shopping Center, Chico, CA 2,854 10,454 0 2,064
Coalinga Shopping Center, Coalinga, CA 816 2,144 0 937
Serra Center, Colma, CA (30% interest)(1) 433 914 0 347
Mercantile Row Shopping Center, Dinuba, CA 1,440 6,208 0 61
Luckys, El Cerrito, CA $250 $450 $0 $625
Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,194 0 (8)
Northridge Shopping Center, Fair Oaks, CA 1,666 6,830 0 (69)
Commonwealth Square Shopping Center, Folsom, CA 3,312 13,022 0 804
Victorian Walk Shopping Center, Fresno, CA 1,120 7,356 0 204
Country Gables Shopping Center, Granite Bay, CA 2,704 12,684 0 659
Pinecreek Shopping Center, Grass Valley, CA
(50% interest)(2) 2,725 7,966 0 111
Heritage Oak Shopping Center, Gridley, CA 1,603 3,597 0 100
Centennial Plaza Shopping Center, Hanford, CA 2,225 8,935 0 83
Nob Hill General Stores, Hollister, CA 960 3,869 0 0
Plaza 580 Shopping Center, Livermore, CA 2,941 11,768 403 674
Canal Farms Shopping Center, Los Banos, CA 1,180 6,904 0 594
Mission Ridge Shopping Center, Manteca, CA 2,373 9,552 0 153
Kmart, Napa, CA
Nob Hill General Stores, Newman, CA 626 2,535 0 0
Currier Square Shopping Center, Oroville, CA 2,025 7,203 0 743
Eastridge Plaza Shopping Center, Porterville, CA 939 4,390 0 60
Belle Mill Landing, Red Bluff, CA 2,247 6,043 0 1,866
Cobblestone Shopping Center, Redding, CA 2,375 7,969 0 185
Kmart Center, Sacramento, CA 1,875 3,116 0 570
Elverta Crossing Shopping Center, Sacramento, CA 3,370 7,477 0 671
Heritage Park Shopping Center, Suisun, CA 3,575 12,187 0 385
Heritage Place Shopping Center, Tulare, CA 1,427 7,117 0 475
Blossom Valley Plaza, Turlock, CA 2,448 8,315 0 411
Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,119 0 327
Park Place Shopping Center, Vallejo, CA 3,850 11,291 109 1,059
Nob Hill General Stores, Watsonville, CA 416 1,084 0 0
Yreka Junction, Yreka, CA 1,350 5,846 288 1,082
Raley's Shopping Center, Yuba City, CA 2,101 5,151 0 1,392
Eagle Station Shopping Center, Carson City, NV 1,735 7,585 0 168
Elko Junction Shopping Center, Elko, NV 2,516 7,631 (184) 6,255
Dodge Center, Fallon, NV (3) 405 1,595 0 32
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Column E
- ------------------------------------------------------------------------------------------------------------------------
Gross amount at which carried at close of period.
- ------------------------------------------------------------------------------------------------------------------------
Properties
Operating
under Direct
Buildings and Financing
Land Improvements Leases Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shopping Center/Retail
- ----------------------
Anderson Square, Anderson, CA 1,145 2,492 3,637
Angel's Camp Town Center, Angels Camp, CA 580 4,576 5,156
Skypark Plaza Shopping Center, Chico, CA 2,854 12,518 15,372
Coalinga Shopping Center, Coalinga, CA 816 3,081 3,897
Serra Center, Colma, CA (30% interest)(1) 433 1,261 1,694
Mercantile Row Shopping Center, Dinuba, CA 1,440 6,269 7,709
Luckys, El Cerrito, CA $250 $1,075 $1,325
Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,186 13,977
Northridge Shopping Center, Fair Oaks, CA 1,666 6,761 8,427
Commonwealth Square Shopping Center, Folsom, CA 3,312 13,826 17,138
Victorian Walk Shopping Center, Fresno, CA 1,120 7,560 8,680
Country Gables Shopping Center, Granite Bay, CA 2,704 13,343 16,047
Pinecreek Shopping Center, Grass Valley, CA
(50% interest)(2) 2,725 8,077 10,802
Heritage Oak Shopping Center, Gridley, CA 1,603 3,697 5,300
Centennial Plaza Shopping Center, Hanford, CA 2,225 9,018 11,243
Nob Hill General Stores, Hollister, CA 960 3,869 4,829
Plaza 580 Shopping Center, Livermore, CA 3,344 12,442 15,786
Canal Farms Shopping Center, Los Banos, CA 1,180 7,498 8,678
Mission Ridge Shopping Center, Manteca, CA 2,373 9,705 12,078
Kmart, Napa, CA 0 386 386
Nob Hill General Stores, Newman, CA 626 2,535 3,161
Currier Square Shopping Center, Oroville, CA 2,025 7,946 9,971
Eastridge Plaza Shopping Center, Porterville, CA 939 4,450 5,389
Belle Mill Landing, Red Bluff, CA 2,247 7,909 10,156
Cobblestone Shopping Center, Redding, CA 2,375 8,154 10,529
Kmart Center, Sacramento, CA 1,875 3,686 5,561
Elverta Crossing Shopping Center, Sacramento, CA 3,370 8,148 11,518
Heritage Park Shopping Center, Suisun, CA 3,575 12,572 16,147
Heritage Place Shopping Center, Tulare, CA 1,427 7,592 9,019
Blossom Valley Plaza, Turlock, CA 2,448 8,726 11,174
Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,446 10,371
Park Place Shopping Center, Vallejo, CA 3,959 12,350 16,309
Nob Hill General Stores, Watsonville, CA 416 1,084 1,500
Yreka Junction, Yreka, CA 1,638 6,928 8,566
Raley's Shopping Center, Yuba City, CA 2,101 6,543 8,644
Eagle Station Shopping Center, Carson City, NV 1,735 7,753 9,488
Elko Junction Shopping Center, Elko, NV 2,332 13,886 16,218
Dodge Center, Fallon, NV (3) 405 1,627 2,032
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Column F Column G Column H Column I
- ------------------------------------------------------------------------------------------------------------------------
Life on which
depreciation
in the latest
income
Accumulated Date of Date statement is
Depreciation Construction Acquired computed
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shopping Center/Retail
- ----------------------
Anderson Square, Anderson, CA 831 1979 1987 5 to 31
Angel's Camp Town Center, Angels Camp, CA 1,645 1986 1985 2 to 31
Skypark Plaza Shopping Center, Chico, CA 3,482 1985/1991 1988 3 to 31
Coalinga Shopping Center, Coalinga, CA 1,137 1977 1987 3 to 31
Serra Center, Colma, CA (30% interest)(1) 744 1972 1973/1988 8 to 31
Mercantile Row Shopping Center, Dinuba, CA 1,433 1990 1990 3 to 31
Luckys, El Cerrito, CA 760 1964/1983 1964 31
Laguna 99 Shopping Center, Elk Grove, CA 1,307 1993 1994 5 to 31
Northridge Shopping Center, Fair Oaks, CA 826 1958/1986 1994 5 to 31
Commonwealth Square Shopping Center, Folsom, CA 3,277 1988/1997 1990 3 to 31
Victorian Walk Shopping Center, Fresno, CA 2,210 1988 1988 3 to 31
Country Gables Shopping Center, Granite Bay, CA 2,949 1988 1991 2 to 31
Pinecreek Shopping Center, Grass Valley, CA
(50% interest)(2) 2,352 1988 1989 5 to 31
Heritage Oak Shopping Center, Gridley, CA 1,239 1981 1987 10 to 31
Centennial Plaza Shopping Center, Hanford, CA 1,031 1991 1994 3 to 31
Nob Hill General Stores, Hollister, CA 388 1994 1994 31
Plaza 580 Shopping Center, Livermore, CA 1,393 1993/1996 1994/1996 4 to 31
Canal Farms Shopping Center, Los Banos, CA 2,350 1988 1986 3 to 32
Mission Ridge Shopping Center, Manteca, CA 1,109 1993 1994 5 to31
Kmart, Napa, CA N/A 1964 1966 N/A
Nob Hill General Stores, Newman, CA 235 1995 1995 31
Currier Square Shopping Center, Oroville, CA 2,175 1969/1989 1989 5 to 31
Eastridge Plaza Shopping Center, Porterville, CA 1,604 1985 1985 3 to 35
Belle Mill Landing, Red Bluff, CA 2,365 1982/1987/1994 1987 3 to 31
Cobblestone Shopping Center, Redding, CA 2,548 1984 1988 3 to 31
Kmart Center, Sacramento, CA 1,304 1964/1986 1986 4 to 31
Elverta Crossing Shopping Center, Sacramento, CA 1,698 1991/1993 1990 3 to 31
Heritage Park Shopping Center, Suisun, CA 3,112 1989 1990 3 to31
Heritage Place Shopping Center, Tulare, CA 2,591 1986 1987 5 to 31
Blossom Valley Plaza, Turlock, CA 2,077 1988/1991 1990 3 to 31
Ukiah Crossroads Shopping Center, Ukiah, CA 2,364 1986 1989 3 to 31
Park Place Shopping Center, Vallejo, CA 3,031 1987 1990 4 to 31
Nob Hill General Stores, Watsonville, CA 664 1982 1982 25
Yreka Junction, Yreka, CA 1,838 1984/1997 1990/1997 5 to 31
Raley's Shopping Center, Yuba City, CA 1,913 1963/1984 1986 5 to 40
Eagle Station Shopping Center, Carson City, NV 2,093 1982 1989 3 to 31
1986/1991/1994
Elko Junction Shopping Center, Elko, NV 2,479 1996/1997 1988/1993 5 to 31
Dodge Center, Fallon, NV (3) 1,224 1976 1977 24 to 31
continued on next page
F-19
<PAGE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- --------------------------------------------------------------------------------------------------------------------
Cost capitalized/(sold)
Initial cost to company subsequent to acquisition
- --------------------------------------------------------------------------------------------------------------------
Buildings and
Property Name Encumbrances Land Improvements Land Improvements
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shopping Center/Retail
- ----------------------
Raley's Supermarket, Fallon, NV 1,000 3,220 0 0
Caughlin Ranch Shopping Center, Reno, NV 2,950 7,123 0 388
North Hills Shopping Center, Reno, NV 5,406 6,911 0 71
West Town, Winnemuca, NV 130 3,386 0 0
----------------------------------------------------------
Total Shopping Center/Retail 0 77,809 265,713 616 23,975
Industrial
- ----------
Viking Freight Systems, Santa Clara, CA 548 0 0 0
Old Dominion, Commerce City, CO (3) 278 648 0 276
----------------------------------------------------------
Total Industrial 0 826 648 0 276
Commercial
- ----------
Coast Savings & Loan, Cupertino, CA 615 845 0 0
Heald Business College, Milpitas, CA 979 6,020 0 684
Coast Savings & Loan, Monterey, CA 911 2,189 0 0
Redwood II, Petaluma, CA 1,017 3,052 0 0
Coast Savings & Loan, Salinas, CA (3) 516 1,632 0 0
Coast Savings & Loan (Market St), San Francisco, CA 873 1,068 0 0
Coast Savings & Loan (Taraval St), San Francisco, CA 366 1,824 0 0
3450 California St., San Francisco, CA 1,450 1,159 0 279
Coast Savings & Loan, Santa Cruz, CA 205 823 0 0
----------------------------------------------------------
Total Commercial 0 6,932 18,612 0 963
----------------------------------------------------------
Total All Properties $0 $85,567 $284,973 $616 $25,214
----------------------------------------------------------
----------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Column E
- -----------------------------------------------------------------------------------------------------------------------
Gross amount at which carried at close of period.
- -----------------------------------------------------------------------------------------------------------------------
Properties
Operating
under Direct
Buildings and Financing
Land Improvements Leases Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Raley's Supermarket, Fallon, NV 1,000 3,220 4,220
Caughlin Ranch Shopping Center, Reno, NV 2,950 7,511 10,461
North Hills Shopping Center, Reno, NV 5,406 6,982 12,388
West Town, Winnemuca, NV 130 3,386 3,516
-----------------------------------------------------------------
Total Shopping Center/Retail 78,425 289,688 386 368,499
Industrial
- ----------
Viking Freight Systems, Santa Clara, CA 548 0 1,096 1,644
Old Dominion, Commerce City, CO (3) 278 924 1,202
-----------------------------------------------------------------
Total Industrial 826 924 1,096 2,846
Commercial
- ----------
Coast Savings & Loan, Cupertino, CA 615 845 1,460
Heald Business College, Milpitas, CA 979 6,704 7,683
Coast Savings & Loan, Monterey, CA 911 2,189 3,100
Redwood II, Petaluma, CA 1,017 3,052 4,069
Coast Savings & Loan, Salinas, CA (3) 516 1,632 2,148
Coast Savings & Loan (Market St), San Francisco, CA 873 1,068 1,941
Coast Savings & Loan (Taraval St), San Francisco, CA 366 1,824 2,190
3450 California St., San Francisco, CA 1,450 1,438 2,888
Coast Savings & Loan, Santa Cruz, CA 205 823 1,028
-----------------------------------------------------------------
Total Commercial 6,932 19,575 0 26,507
------------------------------------------------------------------
Total All Properties $86,183 $310,187 $1,482 $397,852
------------------------------------------------------------------
------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Column F Column G Column H Column I
- ------------------------------------------------------------------------------------------------------------------------
Life on which
depreciation
in the latest
income
Accumulated Date of Date statement is
Depreciation Construction Acquired computed
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shopping Center/Retail
- ----------------------
Raley's Supermarket, Fallon, NV 718 1991 1991 31
Caughlin Ranch Shopping Center, Reno, NV 1,624 1990/1991 1990 3 to 31
North Hills Shopping Center, Reno, NV 2,175 1986 1988/1993 3 to 31
West Town, Winnemuca, NV 1,755 1978/1991 1978 25 to 31
----------
Total Shopping Center/Retail 72,050
Industrial
- ----------
Viking Freight Systems, Santa Clara, CA N/A 1978 1978 N/A
Old Dominion, Commerce City, CO (3) 208 1984 1984 24 to 35
----------
Total Industrial 208
Commercial
- ----------
Coast Savings & Loan, Cupertino, CA 414 1980 1985 25
Heald Business College, Milpitas, CA 2,189 1987 1987 10 to 31
Coast Savings & Loan, Monterey, CA 1,051 1963 1985 25
Redwood II, Petaluma, CA 870 1985 1989 31
Coast Savings & Loan, Salinas, CA (3) 429 1937 1986 40
Coast Savings & Loan (Market St), San Francisco, CA 513 1964 1986 25
Coast Savings & Loan (Taraval St), San Francisco, CA 876 1975 1985 25
3450 California St., San Francisco, CA 665 1957/1987 1987 10 to 31
Coast Savings & Loan, Santa Cruz, CA 238 1980 1986 40
----------
Total Commercial 7,245
----------
Total All Properties $79,503
----------
----------
</TABLE>
(1) Serra Center is encumbered by a note and deed of trust under which the
70% co-owner in the borrower.
(2) Pinecreek is encumbered by a note and deed of trust under which the 50%
co-owner is the borrower.
(3) The Trust is holding this property for sale.
(4) The aggregate cost or adjusted basis of rental property for federal
income tax purposes reconciles to the amount reflected in the financial
statements at December 31, 1997 as follows:
<TABLE>
<S> <C>
Basis for federal income tax purposes $308,979
Direct financing leases capitalized for financial reporting purposes ($3,153)
Reduction in tax basis for deferred gains on condemnation and other
sales and discharge of indebtedness $4,301
Miscellaneous differences $60
--------
Financial statement reporting basis $310,187
--------
--------
</TABLE>
continued on next page
F-20
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
1997 BUILDING IMPROVEMENT AND LEASING RELATED COST ADDITIONS
<TABLE>
<CAPTION>
BUILDING LEASING
NAME LOCATION IMPROVEMENT RELATED COST
- ---- -------- ----------- ------------
SHOPPING CENTERS / RETAIL
-------------------------
<S> <C> <C> <C>
ANDERSON SQUARE ANDERSON, CA $11 $3
SKYPARK PLAZA CHICO, CA 634 18
COALINGA COALINGA, CA 51 -
SERRA CENTER (30%) COLMA, CA 297 16
LAGUNA 99 PLAZA ELK GROVE, CA 1 15
NORTHRIDGE FAIR OAKS, CA 12 -
COMMONWEALTH SQUARE FOLSOM, CA 674 69
VICTORIAN WALK FRESNO, CA 5 2
COUNTRY GABLES GRANITE BAY, CA 255 27
PINECREEK (50%) GRASS VALLEY, CA 0 6
HERITAGE OAK GRIDLEY, CA 7 5
CENTENNIAL PLAZA HANFORD, CA 5 8
PLAZA 580 LIVERMORE, CA 77 30
CANAL FARMS LOS BANOS, CA 89 12
MISSION RIDGE PLAZA MANTECA, CA 120 18
SAN ANTONIO CENTER MOUNTAIN VIEW, CA 16 1
CURRIER SQUARE OROVILLE, CA 4 2
EASTRIDGE PLAZA PORTERVILLE, CA 6 3
BELLE MILL LANDING RED BLUFF, CA 53 12
COBBLESTONE REDDING, CA 19 14
ELVERTA CROSSING SACRAMENTO, CA 32 23
KMART CENTER SACRAMENTO, CA 38 4
HERITAGE PARK SUISUN, CA 107 33
HERITAGE PLACE TULARE, CA 234 38
BLOSSOM VALLEY PLAZA TURLOCK, CA 19 7
CROSSROADS UKIAH, CA - 2
PARK PLACE VALLEJO, CA 62 21
YREKA JUNCTION YREKA, CA 637 40
RALEY'S CENTER YUBA CITY, CA 235 3
EAGLE STATION CARSON CITY, NV 16 9
ELKO JUNCTION ELKO, NV 1,115 62
CAUGHLIN RANCH RENO, NV 53 34
NORTH HILLS RENO, NV 10 11
------ -----
SUBTOTAL - SHOPPING CENTERS / RETAIL $4,894 $ 548
------ -----
INDUSTRIAL
----------
OLD DOMINION FREIGHT COMMERCE CITY, CO 13 36
------ -----
SUBTOTAL - COMMERCIAL $ 13 $ 36
------ -----
TOTAL $4,907 $ 584
------ -----
------ -----
</TABLE>
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
There have been no disagreements with the independent accountants on the
Company's accounting and financial disclosure. Additionally, there has been
no change of the independent accountant engaged to audit the Company's
financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the trustees and executive officers of the
Company is incorporated by reference to the section entitled "Trustees and
Executive Officers" of the Company's definitive Proxy Statement in connection
with the annual Meeting of Shareholders to be held May 14, 1998, which will
be filed with the Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, pursuant to General Instruction G to
this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is incorporated by
reference to the sections entitled "Compensation of Trustees", "Compensation
of Executive Officers", "Compensation Pursuant to Plans or Arrangements",
"Stock Option Grants and Exercises" and "Report of Compensation Committee on
Executive Compensation" of the Company's definitive Proxy Statement in
connection with the annual Meeting of Shareholders to be held May 14, 1998,
which will be filed with the Commission not later than 120 days after the end
of the fiscal year covered by this Form 10-K, pursuant to General Instruction
G to this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled
"Ownership of Shares" of the Company's definitive Proxy Statement in
connection with the annual Meeting of Shareholders to be held May 14, 1998,
which will be filed with the Commission not later than 120 days after the end
of the fiscal year covered by this Form 10-K, pursuant to General Instruction
G to this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company, its employees, officers or trustees are not engaged in any
related transactions with the Company. As of December 31, 1997, the Company
had not made any loans to its management.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) 1. Financial Statements - Included in Item 8
Report of Independent Certified Public Accountants 28
Balance Sheets - December 31, 1997 and 1996 29
Financial Statements for the Years Ended
December 31, 1997, 1996 and 1995:
Statements of Income 30
Statements of Shareholders' Equity 31
Statements of Cash Flows 32
Notes to Financial Statements 33-35
2. Financial Statement Schedule III: Real Estate and
Accumulated Depreciation 46-47
3. Additional Information: 1997 Building Improvement
and Leasing Related Cost Additions (unaudited) 48
(b) 1. Reports on Form 8-K.
None.
(c) Exhibits.
(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).
(4.2) 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).
50
<PAGE>
(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)** 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
(23) * Consent of Independent Certified Public Accountants 52
(27) Financial Data Schedule
</TABLE>
- ----------
* Filed with this report.
** Management contract or compensatory plan or arrangement.
51
<PAGE>
Consent of Independent Certified Public Accountants
The Trustees
Western Investment Real Estate Trust:
We consent to incorporation by reference in the registration statement (No.
33-71270) on Form S-3 and the registration statement (No. 33-27016) on Form
S-8 of Western Investment Real Estate Trust of our report dated January 29,
1998, relating to the balance sheets of Western Investment Real Estate Trust
as of December 31, 1997 and 1996, and the related statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, and the related financial statement schedule,
which report appears in the December 31, 1997, annual report on Form 10-K of
Western Investment Real Estate Trust.
KPMG PEAT MARWICK LLP
San Francisco, California
January 29, 1998
52
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned there unto duly authorized.
WESTERN INVESTMENT REAL ESTATE TRUST
(Registrant)
By: /s/ Dennis D. Ryan
------------------------------------------------
Dennis D. Ryan
Executive Vice President,
Chief Financial Officer
Dated: March 30, 1998 and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Chester R. MacPhee, Jr. Acting Chairman March 30, 1998
- ---------------------------- of the Board
Chester R. MacPhee, Jr. and Trustee
/s/ Bradley N. Blake President, Chief March 30, 1998
- ---------------------------- Executive Officer
Bradley N. Blake and Trustee
/s/ Dennis D. Ryan Executive Vice March 30, 1998
- ---------------------------- President, Chief
Dennis D. Ryan Financial Officer
and Trustee
/s/ Robert J. McLaughlin Trustee March 30, 1998
- ----------------------------
Robert J. McLaughlin
/s/ Reginald B. Oliver Trustee March 30, 1998
- ----------------------------
Reginald B. Oliver
/s/ James L. Stell Trustee March 30, 1998
- ----------------------------
James L. Stell
</TABLE>
53
<PAGE>
COMPENSATION AGREEMENT
This Compensation Agreement (the "Agreement") is entered into as of
December 31, 1997 (the "Effective Date") by and between Western Investment
Real Estate Trust (the "Trust") and O.A. Talmage (the "Recipient") with
reference to the following:
A. The Trust has currently in effect a Trustee Emeritus Program and
a Death and Disability Program (together, the "Programs") in which the
Recipient has participated or may be eligible to participate.
B. In exchange for the Recipient's withdrawal from and renouncing of
eligibility for such Programs, the Trust agrees to enter into this Agreement.
NOW, THEREFORE, the parties agree as follows:
1.1 WITHDRAWAL FROM THE PROGRAMS. The parties acknowledge that, as
of the Effective Date, the Recipient has elected to participate in the
Programs or may become entitled to participate in the Programs in the future.
The Recipient hereby (a) agrees to be excluded from eligibility in either
Program, (b) terminates any current participation in either Program, and (c)
quitclaims and releases any and all of his present or future rights, title
and interest in and to the benefits under either Program. In exchange for
such promises, the Trust shall provide the Recipient with the benefits set
forth in this Agreement.
1.2 COMPENSATION. The Trust shall pay the Recipient a monthly
stipend equal to five thousand dollars ($5,000) commencing on January 1, 1998
and continuing until the Recipient dies or an accelerated payment is made
pursuant to Section 1.4.
1.3 BENEFITS UPON THE DEATH OF THE RECIPIENT. Upon the death of the
Recipient, the Trust shall pay a monthly benefit equal to five thousand
dollars ($5,000) to the spouse of the Recipient as of the Effective Date
("eligible spouse"). If the Recipient dies without leaving an eligible
spouse, no death benefit payments will be due from the Trust to anyone under
this Agreement. Death benefits shall be paid beginning the first day of the
month following the death of the Recipient and continuing until the death of
his eligible spouse or an accelerated payment is made pursuant to Section 1.4.
1.4 ACCELERATED PAYMENTS. (a) If the net assets of the Trust (as
reported in its financial statements prepared in accordance with generally
accepted accounting principles) fall below fifteen million dollars
($15,000,000) (a "Net Asset Value Event"), the Trust shall pay the Recipient
or his eligible spouse, as the case may be, an amount equal to the sum of the
Present Value Amount and the Tax Coverage Amount. Accelerated payments under
this Section 1.4 shall be made within sixty (60) days after the occurrence of
a Net Asset Value Event. For purposes of this agreement: present value shall
be determined based on a discount rate of seven percent (7%) per annum over
the Life Expectancy Period; "Life Expectancy Period" shall mean the greater
of the life expectancy of such Recipient or his eligible spouse, as of the
date upon which the Net Asset Value Event occurs, determined according to the
1983 Group Annuity Mortality Table (as published in IRS Revenue Ruling 95-6);
"Present Value Amount" shall mean an amount equal to the present value of the
total amount the Recipient or his eligible spouse, as applicable, would have
received under the provisions of Sections 1.2 or 1.3 if the Net Asset Value
Event had not occurred; "Tax Factor" shall mean one less forty-five percent
(45%); and "Tax Coverage
<PAGE>
Amount" shall mean an amount equal (i) to the quotient of the Present Value
Amount made pursuant to this Section 1.4 divided by the Tax Factor, less (ii)
the Present Value Amount. An application of the formula to determine an
accelerated payment under this Section 1.4(a) is as follows:
The Tax Factor equals 55% (1 minus 45%). If the Present Value Amount
were $600,000, the Present Value Amount and the Tax Factor would yield
a "Tax Coverage Amount" of $490,909, calculated as follows:
First, the Present Value Amount ($600,000) divided by the Tax
Factor (55%) equals $1,090,909. Second, $1,090,909 minus the
Present Value Amount ($600,000) equals a Tax Coverage Amount
of $490,909. Thus, the total payment to the Recipient in this
example is the Present Value Amount ($600,000) plus the Tax
Coverage Amount ($490,909) for a total payment to the
Recipient of $1,090,909.
(b) The Trust represents and warrants for the benefit of Recipient,
his eligible spouse and their respective successors and assigns, that any
accelerated payment made under this Section 1.4 will not constitute an
"excess parachute payment" for purposes of Internal Revenue Code Sections
280G and 4999. This representation shall survive and continue beyond the
Effective Date of this Agreement. Any breach of this representation shall
constitute a breach of this Agreement by the Trust and shall entitle the
Recipient, his eligible spouse or their respective successors and assigns to
receive from the Trust, or its successors or assigns, all damages that result
from such breach.
1.5 NO ASSIGNMENT. Payments under this Agreement shall be paid only
to or for the benefit of the persons entitled thereto. No person shall have
any right whatsoever to anticipate, assign or in any manner encumber or
hypothecate any benefit under this Agreement, or subject the same to any
creditor's claim or legal process, prior to actual payment to the payee
otherwise entitled to such payment.
1.6 BINDING EFFECT. The terms and conditions of this Agreement shall
inure to the benefit of, and be binding upon, the successors and permitted
assigns of the parties as set forth herein, but are not intended, nor shall
this Agreement be construed, to confer any enforceable rights on any person
not a party hereto.
1.7 ENTIRE AGREEMENT. This instrument contains the entire agreement
between the parties with respect to the subject matter hereof, supersedes any
and all prior negotiations, correspondence, understandings and agreements
between the parties with respect to the subject matter hereof, including the
Programs, and may be modified only by a written instrument executed by all
parties hereto.
1.8 ATTORNEYS FEES. In any litigation between the parties to this
Agreement, arising under or relating to this Agreement, the prevailing party
shall be entitled to recover reasonable attorneys' fees and expenses of
litigation incurred.
1.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
1.10 GOVERNING LAW. The provisions of this Agreement shall be
construed in accordance with, and governed by, the laws of the State of
California.
-2-
<PAGE>
1.11 HEADINGS. The headings of the paragraphs herein are included
for purposes of convenience only, and shall not affect the construction or
interpretation of this Agreement in any manner.
IN WITNESS WHEREOF, the parties have entered into this Agreement as
of the day and year first above written.
WESTERN INVESTMENT REAL ESTATE TRUST RECIPIENT
By:
---------------------------- ---------------------------
Title: Name: O. A. Talmage
--------------------------
ELIGIBLE SPOUSE
By:
---------------------------- ---------------------------
Title: Name:
-------------------------- ----------------------
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND BALANCE SHEET AT DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,463
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 392,470
<DEPRECIATION> 77,642
<TOTAL-ASSETS> 337,521
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 143,866
0
0
<COMMON> 242,682
<OTHER-SE> (56,433)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 337,521
<SALES> 0
<TOTAL-REVENUES> 47,551
<CGS> 0
<TOTAL-COSTS> 11,809<F4>
<OTHER-EXPENSES> 12,787<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,511
<INCOME-PRETAX> 14,500
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,500
<DISCONTINUED> 0
<EXTRAORDINARY> 1,620
<CHANGES> 0
<NET-INCOME> (12,880)
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75<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 (8,798) and Other Operating
Expenses (3,011).
<F5>Amount comprised of Depreciation expense (11,046) and General and
Administrative expense (1,741).
<F6>Exercise of the convertible debentures would not have material effect on
earnings per share. The convertible debentures were redeemed during October,
1997.
</FN>
</TABLE>
