<PAGE>
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-08723
WESTERN INVESTMENT REAL ESTATE TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-6100058
- --------------------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 POWELL ST., STE. 600, EMERYVILLE, CA 94608
- --------------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 597-0160
-------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares of Beneficial Interest, No Par Value - 17,226,228 shares as of July 26,
1999
1
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
INDEX TO 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited) 3
Consolidated Balance Sheets - June 30, 1999, and
December 31, 1998 4
Consolidated Statements of Income - Three and Six
months ended June 30, 1999 and 1998 5
Consolidated Statements of Shareholders' Equity -
Six months ended June 30, 1999 and year ended
December 31, 1998 6
Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of Financial 15-20
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21-23
SIGNATURE 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
The financial statements included in this report have been prepared by the
Company, without audit, pursuant to the rules of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules.
Interim results are not necessarily indicative of results for a full year.
The interim financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented in accordance with the instructions to Form 10-Q.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's latest
annual report on Form 10-K. When necessary, reclassifications have been made
to prior period balances to conform to current period presentation.
When used in the discussion in this Form 10-Q, the words "believes,"
"expects," "intends," "anticipates," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ
materially from those discussed, including, but not limited to those set
forth in the section entitled "Potential Factors Affecting Future Operating
Results," in Management's Discussion and Analysis of Financial Condition and
Results of Operations, below. Readers are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results
of any revisions to the forward-looking statements, which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
3
<PAGE>
CONSOLIDATED BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, December 31,
ASSETS 1999 1998
-------------------------- ---------------------
(In thousands, except share and per share data)
<S> <C> <C>
Real estate investments:
Real estate properties....................................................... $ 413,297 $ 410,183
Less accumulated depreciation and amortization............................... (88,321) (82,660)
------------------ -------------------
324,976 327,523
Real estate properties held for sale......................................... 17,464 30,288
Less accumulated depreciation and amortization............................... (4,173) (7,452)
------------------ -------
13,291 22,836
Unconsolidated real estate subsidiary....................................... 44,474 43,854
Mortgage notes receivable................................................... 16,724 16,160
----------------- ------------------
Net real estate investments.............................................. 399,465 410,373
Cash and cash equivalents....................................................... 1,102 1,512
Accounts receivable and other assets............................................ 12,680 13,704
Deferred long-term debt issuance costs, net..................................... 1,378 1,302
----------------- ------------------
$ 414,625 $ 426,891
----------------- ------------------
----------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank line of credit............................................................. $ 75,100 $ 85,700
Senior notes, net............................................................... 124,808 124,794
Mortgage payable................................................................ 9,910 10,009
----------------- ------------------
209,818 220,503
Interest payable................................................................ 3,510 3,670
Prepaid rents and security deposits............................................. 1,816 2,161
Other liabilities............................................................... 3,743 3,517
----------------- ------------------
Total liabilities............................................................ 218,887 229,851
----------------- ------------------
Minority interests.............................................................. 17,416 17,416
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: June 30, 1999 - 17,226,228 shares................
December 31, 1998 - 17,216,550 shares............ 242,132 241,741
Accumulated dividends in excess of net income................................ (63,810) (62,117)
------------------ -------------------
Total shareholders' equity................................................... 178,322 179,624
----------------- ------------------
$ 414,625 $ 426,891
----------------- ------------------
----------------- ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------------- ---------------------------
(In thousands, except share and (In thousands, except share
per share data) and per share data)
<S> <C> <C> <C> <C>
REVENUES:
Minimum rents................................................. $ 11,032 $ 10,466 $ 22,100 $ 20,516
Percentage rents.............................................. 137 230 374 444
Recoveries from tenants....................................... 2,649 2,324 4,429 3,772
Interest income............................................... 429 114 871 178
Income from unconsolidated real estate subsidiary............. 138 -- 145 --
Other income.................................................. 311 199 430 295
-------------- ------------- ------------ -------------
Total revenues..................................................... 14,696 13,333 28,349 25,205
-------------- ------------- ------------- -------------
EXPENSES:
Interest...................................................... 3,516 3,324 7,050 6,273
Property operating costs...................................... 2,847 2,529 4,761 4,100
Depreciation and amortization................................. 2,977 3,126 5,925 6,173
Other operating expenses...................................... 1,293 1,027 2,435 2,022
General and administrative.................................... 623 668 1,514 1,587
-------------- ------------- -------------- -------------
Total expenses..................................................... 11,256 10,674 21,685 20,155
-------------- ------------- ------- ------ -------------
Income before gains (loss) on sales of real estate
investments................................................. 3,440 2,659 6,664 5,050
Gains (loss) on sales of real estate investments................... 2,113 (30) 2,113 (30)
-------------- -------------- -------------- -------------
Income before minority interest............................... 5,553 2,629 8,777 5,020
Minority interest.................................................. 399 -- 802 --
-------------- -------------- -------------- -------------
Net income......................................................... $ 5,154 $ 2,629 $ 7,975 $ 5,020
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Basic net income per share......................................... $ 0.30 $ 0.15 $ 0.46 $ 0.29
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Diluted net income per share....................................... $ 0.30 $ 0.15 $ 0.46 $ 0.29
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Cash dividends paid................................................ $ 0.28 $ 0.28 $ 0.56 $ 0.56
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Weighted average number of shares outstanding--Basic......... 17,222,814 17,204,313 17,220,368 17,199,385
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Weighted average number of shares outstanding--Diluted....... 18,703,739 17,269,357 17,265,058 17,274,992
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Six Months Ended June 30, 1999,
and Year Ended December 31, 1998
(In thousands, except share data)
Accumulated
Dividends Total
Shares of in Excess of Share-
Beneficial Interest Net holders'
Number Amount Income Equity
---------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998.......................... 17,191,860 $242,682 $ (56,433) $186,249
Net proceeds from issuance of shares.............. 12,453 182 -- 182
Shares issued under restricted stock plan......... 12,237 176 -- 176
Loans to officers................................. -- (1,299) -- (1,299)
Net income........................................ -- -- 13,616 13,616
Cash dividends.................................... -- -- (19,300) (19,300)
---------- -------- ------------- ------------
Balance, December 31, 1998........................ 17,216,550 241,741 (62,117) 179,624
Shares issued under restricted stock plan......... 9,678 131 -- 131
Forgiveness of loans to officers.................. -- 260 -- 260
Net income........................................ -- -- 7,975 7,975
Cash dividends.................................... -- -- (9,668) (9,668)
---------- -------- ------------- ------------
BALANCE, JUNE 30, 1999............................ 17,226,228 $242,132 $ (63,810) $178,322
---------- -------- ------------- ------------
---------- -------- ------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS WESTERN INVESTMENT REAL ESTATE TRUST
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited) Six Months Ended
June 30,
--------
1999 1998
-------- -----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 7,975 $ 5,020
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest............................................................ 802 --
Depreciation and amortization................................................ 5,925 6,173
Amortization of deferred debt issuance costs................................. 229 171
(Gains) loss on sales of real estate investments............................. (2,113) 30
Earned compensation on restricted stock plan................................. (131) --
(Increase) decrease in accounts receivable and other assets.................. (875) 108
Decrease in deferred rent receivable......................................... (283) (103)
(Decrease) increase in interest payable...................................... (160) 135
(Decrease) increase in prepaid rents and security deposits and other
liabilities................................................................ (119) 1,244
Forgiveness of loans to officers............................................. 260 --
------------- -----------
Net cash provided by operating activities.................................... 11,772 12,778
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of real estate investments..................................... 10,315 292
Investment in notes receivable..................................................... (1,364) (6,223)
Acquisition of real estate investments............................................ -- (28,250)
Investment in unconsolidated real estate subsidiary................................ (620) --
Funds released from escrow..................................................... 2,625 7,117
Improvements of real estate investments:
Build-to-suit developments................................................... -- (108)
New leases................................................................... (1,084) (814)
General...................................................................... (678) (293)
Recovery of investment in direct financing leases.................................. 83 187
------------- -----------
Net cash provided by (used in) investing activities.......................... 9,277 (28,092)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on Bank Line.............................................................. 20,450 44,850
Principal payments on Bank Line.................................................... (31,050) (18,950)
Principal payments on mortgage note payable.................................... (99) (61)
Loans to officers.............................................................. -- (1,299)
Net proceeds from issuance of shares........................................... -- 182
Deferred long term issuance costs.................................................. (290) (20)
Cash distributions to minority interest............................................ (802) --
Cash dividends paid................................................................ (9,668) (9,631)
------------- -----------
Net cash used in financing activities........................................ (21,459) (15,071)
------------- -----------
Net decrease in cash and cash equivalents.................................... (410) (243)
Cash and cash equivalents, at the beginning of period............................. 1,512 1,463
------------- -----------
Cash and cash equivalents, at the end of period.................................... $ 1,102 $ 1,220
------------- -----------
------------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of interest capitalized.............. $ 6,981 $ 5,986
------------- -----------
------------- -----------
NON CASH FINANCING ACTIVITIES:
Real estate acquisition debt....................................................... $ -- $ 10,266
------------- -----------
------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
Note 1: ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
(A) DESCRIPTION OF ORGANIZATION
Founded in 1962, Western Investment Real Estate Trust ("Western") and its
affiliates own and operate community and neighborhood shopping centers located
in the western United States. The corporate office of the self-administered
equity real estate investment trust is in the San Francisco Bay Area city of
Emeryville, California. Its shares are traded on the American Stock Exchange
under the symbol "WIR".
The accompanying consolidated financial statements include the accounts of
Western, Western/Kienow's L.P. and a joint venture in which Western has a
controlling financial interest (collectively, the Company). Western is the sole
general partner in Western/Kienow's L.P. At June 30, 1999, the Company's real
estate portfolio comprised 64 investments, 54 of which were retail properties.
(B) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES. The Company
adopted SOP 98-5 in its first quarter 1999 financial statements, the effective
date of SOP 98-5. Accordingly, the Company expensed approximately $57,000 of
organizational costs in the quarter ended March 31, 1999. These costs had been
previously capitalized. This amount has been included in general and
administrative expenses for the three months ended March 31, 1999.
8
<PAGE>
Note 2: REAL ESTATE INVESTMENTS
At June 30, 1999, the Company had investments in 64 properties, totaling 5.6
million leasable square feet. Included in this total are five properties which
were held for sale and which total 225,000 leasable square feet.
Occupancy percentages for the Company's portfolio is as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 June 30, 1998
------------- ----------------- -------------
<S> <C> <C> <C>
Shopping centers(1)(3) 92.7% 92.5% 92.7%
Single-tenant retail 65.5%(2) 100.0% 100.0%
Commercial and other 94.4% 96.1% 96.2%
Overall occupancy 91.2% 93.1% 93.5%
</TABLE>
Occupancy percentage is based on square footage leased as a percent of total
leasable square feet.
(1) "Same Store" shopping centers (i.e. those shopping centers owned for the
entire two-year period ended June 30, 1999) occupancy was 93.5% and
92.4% at June 30, 1999 and 1998, respectively.
(2) The Single-tenant retail occupancy rate reflects the January, 1999
expiration of the Kmart/Napa lease of 103,284 square feet, the only
difference to the December 31, 1998 occupancy.
(3) The 10 Portland, Oregon retail properties that are held through an
unconsolidated subsidiary (Kienow's Food Store, Inc.) are not included
in the above occupancy percentages. These properties are undergoing
extensive retenanting and redevelopment.
During the quarter ended June 30, 1999, the Company sold three commercial
properties as follows:
- - On April 1, 1999, the Company sold an 18,253 square foot office building
located in Salinas, California, for $1,900,000, at a gain of $68,000. The
sales proceeds were used to reduce the balance on the Bank Line.
- - On April 28, 1999, the Company sold a 47,150 square foot office building
located in Milpitas, California, for $6,726,000, at a gain of $923,000. The
sales proceeds were used to reduce the balance on the Bank Line.
- - On April 29, 1999, the Company sold a 6,495 square foot office building
located in Cupertino, California, for $2,250,000, at a gain of $1,122,000.
The sales proceeds were used to reduce the balance on the Bank Line.
Additionally, during the quarter, the Company, through its unconsolidated real
estate subsidiary, acquired undeveloped land located in Lodi, California for
$2,650,000. The acquisition was funded from section 1031 exchange proceeds
resulting from the sale of four Oregon non-core properties that were acquired in
1998 as part of the Kienow's Food Stores, Inc. portfolio. (See Note 5 to the
consolidated financial statements in the Company's 10-K for the fiscal year
ended December 31, 1998). Simultaneous with the land acquisition, the Company
entered into a ground lease agreement, whereby the Company believes it will earn
areturn of 10% on its investment.
9
<PAGE>
Note 3: UNCONSOLIDATED REAL ESTATE SUBSIDIARY
In October 1998, the Company acquired Kienow's Food Stores, Inc. (Kienow's), a
Portland, Oregon-based grocery wholesaler and retailer, whose principal assets
are its real estate properties comprising six shopping centers, four
freestanding stores and eight non-core properties. The Company intends to retain
and redevelop the 10 core retail properties (six shopping centers and four
freestanding stores), encompassing 449,217 square feet, located in the greater
Portland area. For the six months ended June 30, 1999, in connection with the
redevelopment of the 10 core retail properties, the Company capitalized $791,000
in interest.
As of June 30, 1999, the Company has executed six anchor tenant leases and
completed the disposition of four non-core properties in Oregon.
Note 4: CAPITAL EXPENDITURES
COSTS CAPITALIZED DURING THE PERIOD
It is the Company's practice to capitalize expenditures that exceed $4,000
and which are associated with the improvement and rental of real estate
investments. Capitalized costs include leasing-related costs and property
improvements. Capital expenditures for the three and six months ended June
30, 1999, and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---------------------------------- --------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
"Build to Suit" capital improvements..................... $ -- $ -- $ -- $ 108
Capitalized costs incurred in connection with
leasing previously UNLEASED space.................. 2 3 13 35
Capitalized costs incurred in connection with
leasing previously LEASED space..................... 706 474 1,071 779
Capitalized costs which relate to
improvements to common areas....................... 557 67 678 293
------ ----- ------ ------
Total Capitalized expenditures........................... $1,265 $ 544 $1,762 $1,215
------ ----- ------ ------
------ ----- ------ ------
Improvements............................................. $1,251 $ 332 $1,714 $ 839
Leasing-related costs.................................... 14 212 48 376
------ ----- ------ ------
Total capitalized expenditures........................... $1,265 $ 544 $1,762 $1,215
------ ----- ------ ------
------ ----- ------ ------
</TABLE>
COMMITMENTS AT JUNE 30, 1999
As of June 30, 1999, the Company had commitments under several new leases which
will result in expenditures of approximately $500,000 in real estate
improvements and leasing commissions.
10
<PAGE>
COSTS ASSOCIATED WITH LEASING ACTIVITY DURING THE PERIOD
During the three months ended June 30, 1999, the Company entered into leases
that obligate the Company to fund certain property improvements. These
obligations relate to both new leases and lease renewals. A portion of these
obligations were paid and capitalized during the quarter ended June 30, 1999,
and are reflected in the preceding table.
The aggregate and per-square-foot information representing capitalized
expenditures associated with leasing 13,600 square feet of new leases and 700
square feet of renewal leases the Company executed during the quarter is as
follows:
- --------------------------------------------------------------------------------
NEW LEASES
<TABLE>
<CAPTION>
Tenant
PROPERTY TYPE Improvements
---------------------------------------
Per Per
Aggregate Square Square
Amount Foot (1) Foot (2)
----------- ---------- -----------
<S> <C> <C> <C>
Shopping centers &
single-tenant retail
properties $52,400 $3.85 $2.22
</TABLE>
- --------------------------------------------------------------------------------
LEASES RENEWALS
<TABLE>
<CAPTION>
Tenant
PROPERTY TYPE Improvements
---------------------------------------
Per Per
Aggregate Square Square
Amount Foot (1) Foot (2)
----------- ---------- -----------
<S> <C> <C> <C>
Shopping centers &
single-tenant retail
properties $4,975 $7.11 $0.14
</TABLE>
(1) Average per square foot for only those leases where the Company incurred an
obligation to pay tenant improvements or leasing commissions (Capitalizable
obligations divided by square feet associated with capitalizable
obligations).
(2) Average per square foot for all leases executed during the quarter (Total
obligations incurred divided by total square feet leased).
11
<PAGE>
Note 5: SEGMENT DISCLOSURE
FASB No. 131 requires disclosure about segments of the Company and related
information.
The Company evaluates performance and makes resource-allocation decisions on an
individual property basis. For financial reporting purposes, the Company has
grouped its properties into three segments: shopping centers, single-tenant
retail and other commercial properties. Investments principally consist of real
estate, but also include real estate secured loans (three) and a real estate
joint venture (one).
Non-segment revenue consists mainly of interest income. Non-segment assets
include cash, accounts receivable and deferred financing costs.
The accounting policies of the segments are the same as those described in Note
1 to the Company's annual report on Form 10-K for the year ended December 31,
1998.
The Company assesses and measures segment operating results based on a
performance measure referred to as Funds From Operations ("FFO"). The National
Association of Real Estate Investment Trusts 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 (a) reduced by gains and increased by losses on (i) sales of
property and (ii) extraordinary and unusual items, and (b) after adjustments for
unconsolidated partnerships and joint ventures, so as to reflect FFO on the same
basis. 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.
12
<PAGE>
The revenues and profit (loss), for each of the reportable segments are
summarized as follows for the quarter and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---------------------------- --------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Shopping centers....................................... $ 13,052 $ 11,741 $ 24,949 $ 22,138
Single tenant retail................................... 399 565 827 1,168
Commercial and other................................... 1,191 1,007 2,437 1,857
Non-segment............................................ 54 20 136 42
------------ ----------- ---------- -----------
Total revenues...................................... $ 14,696 $ 13,333 $ 28,349 $ 22,205
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
PROFIT (LOSS):
Funds from operations:
Shopping centers....................................... $ 10,016 $ 9,232 $ 19,788 $ 17,940
Single tenant retail................................... 389 564 779 1,144
Commercial and other................................... 1,028 874 2,274 1,722
------------ ----------- ---------- -----------
Total segment FFO................................... 11,433 10,670 22,841 20,806
Interest income........................................ 62 16 142 43
Other income........................................... 13 2 15 7
Interest expense....................................... (3,516) (3,324) (7,050) (6,273)
Other operating expense................................ (953) (912) (1,788) (1,773)
Depreciation........................................... (48) (26) (91) (51)
General and administrative............................. (623) (668) (1,514) (1,587)
------------- ------------ ----------- ------------
Consolidated FFO................................... 6,368 5,758 12,555 11,172
Plus gains (less loss) on sales of real estate
investments........................................ 2,113 (30) 2,113 (30)
Less depreciation and amortization..................... (2,930) (3,101) (5,834) (6,122)
Less minority interest................................. (399) -- (802) --
Less change in accounting principle.................... -- -- (57) --
------------ ----------- ----------- -----------
Net income......................................... $ 5,154 $ 2,629 $ 7,975 $ 5,020
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
</TABLE>
13
<PAGE>
The assets for each of the reportable segments are summarized as follows as of
June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- --------------
(in thousands)
<S> <C> <C>
ASSETS
Shopping centers..................... $375,066 $364,879
Single tenant retail................. 11,080 20,352
Commercial and other................. 21,782 25,627
Non-segment.......................... 6,697 16,033
-------- --------
Total assets...................... $414,625 $426,891
-------- --------
-------- --------
</TABLE>
Note 6: 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 three and six months ended June 30, 1999 and 1998
is shown below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 17,222,814 17,204,313 17,220,368 17,199,385
Plus: Options with exercise prices below period-
end market price of common stock 8,976 65,044 5,105 75,607
Stock issued under restricted stock plan 39,585 -- 39,585 --
OP units convertible into shares of beneficial
interest 1,432,364 -- -- --
---------- ---------- ---------- ----------
Adjusted weighted average shares outstanding 18,703,739 17,269,357 17,265,058 17,274,992
</TABLE>
During the three and six months ended June 30, 1999, the Company had
1,432,364 Operating Partnership (OP) Units outstanding. These OP Units are
reflected in the above calculation for the three months ended June 30, 1999.
Hypothetical conversion of these OP Units had the effect of increasing
earnings per share for the six months ended June 30, 1999, and as such,
conversion was not assumed for this period.
The following stock options are not included in the diluted earnings per
share calculation because the options' exercise price was greater than the
average market price of the common shares for the three and six months ended
June 30, 1999, and therefore, the effect would be antidilutive (For the three
and six months ended June 30, 1998, there were no stock options not included
in the diluted earnings per share calculation):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1999
------------------ -----------------
<S> <C> <C>
Number of options 741,100 741,100
Range of exercise prices $12.31-$14.78 $12.31-$14.78
</TABLE>
14
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
The discussions in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contain certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 which reflect
management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties including, but not limited to, the effects of future events on the
Company's financial performance; the risk that the Company may be unable to
finance its planned acquisition and development activities; risks related to the
retail, commercial or industrial businesses in which the Company's properties
compete, including the potential adverse impact of external factors such as
inflation, consumer confidence, unemployment rates and consumer tastes and
preferences; risks associated with significant tenants including the potential
adverse impact should a significant tenant experience financial difficulties;
risks associated with the Company's development activities, such as the
potential for cost overruns, delays and lack of predictability with respect to
the financial returns associated with these development activities; the risk of
potential increase in market interest rates from current rates; and risk
associated with real estate ownership, such as the potential adverse impact of
environmental contamination or changes in the local economic climate on the
revenues and the value of the Company's properties.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flows provided by operations and other sources
available to the Company will continue to provide adequate funds for all current
principal and interest payments as well as dividend payments 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 existing Bank Line, as well as other debt and equity
alternatives, are expected to provide the necessary funds to achieve future
growth.
The agreements executed in connection with the Company's senior notes and its
Bank Line contain certain covenants (including minimum shareholders' equity,
maximum ratio of debt to net worth and income coverage requirements) which
impose certain limitations on the incurrence of additional debt and other
restrictions on the Company.
As of June 30, 1999, the Company's aggregate outstanding indebtedness of
$209,818,000 consisted of $134,718,000 in fixed rate, long-term debt and
$75,100,000 of borrowings under the Company's variable rate, unsecured Bank
Line.
As of June 30, 1999, the Company had $21.6 million available under its $100
million Bank Line. The availability on the $100 million Bank Line is reduced
by a $3.3 million outstanding letter of credit which is related to the
Company's investment in the Walnut Creek development. The Company intends to
replace or renew the Bank Line before it expires on September 30, 2001.
15
<PAGE>
COMMITMENTS AND CONTINGENCIES
In connection with the redevelopment of a property located in Walnut Creek,
California, the Company committed to fund $26.5 million on a note secured by
a first deed of trust on the property under development. At June 30, 1999,
the Company had funded a total of $7.3 million relating to this investment.
As of June 30, 1999, the Company had commitments under several new leases
which will result in expenditures of approximately $500,000 in real estate
improvements and leasing commissions.
FUNDS FROM OPERATIONS
Industry analysts and the Company consider Funds from Operations (FFO) to be
an alternate measure of an equity REIT's performance since such measure does
not recognize depreciation and amortization of real estate assets as
reductions of income from operations. Historical cost accounting for real
estate assets implicitly assumes that the value of real estate assets
diminishes predictably over time. Yet, since real estate values have
historically risen or fallen with market conditions, the Company, along with
most industry investors, considers presentation of operating results for real
estate companies that use historical cost accounting to be less than fully
informative.
The National Association of Real Estate Investment Trusts (NAREIT) defines
Funds From Operations as net income calculated in accordance with generally
accepted accounting principles (GAAP), plus depreciation and amortization of
assets uniquely significant to the real estate industry, (a) reduced by gains
and increased by losses on (i) sales of property, and (ii) extraordinary and
unusual items, and (b) after adjustments for unconsolidated partnerships and
joint ventures, so as to reflect FFO on the same basis. 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.
16
<PAGE>
The table below provides a reconciliation of net income in accordance with
GAAP to FFO, as calculated in accordance with NAREIT's guidelines, for the
three and six months ended June 30, 1999 and 1998, assuming full conversion
of all minority interest (operating partnership units):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1999 1998 1999 1998
------------------------ ----------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income................................................ $ 5,154 $ 2,629 $7,975 $5,020
Less: Gains on sales of real estate investments........... (2,113) -- (2,113) --
Plus: Loss on sale of real estate investments............. -- 30 30
Real property depreciation....................... 2,594 2,715 5,185 5,384
Amortization of tenant improvement costs......... 251 299 481 561
Amortization of leasing-related costs............ 83 85 168 177
Minority interest................................ 399 -- 802 --
Cumulative effect of change in accounting
principle.................................... -- -- 57 --
------------ ----------- ----------- -----------
Funds From Operations..................................... $ 6,368 $ 5,758 $12,555 $11,172
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED JUNE 30, 1999 AND 1998
Net income increased $2,525,000 to $5,154,000 for the quarter ended June 30,
1999 from $2,629,000 for the comparable quarter in 1998. On a per share basis
(calculated using diluted weighted average shares outstanding), net income
increased $0.15 to $0.30 for the quarter ended June 30, 1999 from $0.15 for
the comparable quarter in 1998. This increase in net income is principally
due to gains of $2,113,000 realized from the sale of three properties. Other
factors contributing to the increase include increased minimum rents,
recoveries from tenants, interest income, income from unconsolidated real
estate subsidiary and other income partially offset by increased interest
expense, property operating costs, other operating expenses and minority
interest.
- - Minimum rents increased $566,000 to $11,032,000 for the quarter ended June
30, 1999, from the comparable 1998 quarter of $10,466,000.
- - Recoveries from tenants increased $325,000 to $2,649,000 for the quarter
ended June 30, 1999, from the comparable 1998 quarter of $2,324,000.
- - Property operating costs increased $318,000 to $2,847,000 for the quarter
ended June 30, 1999, from the comparable 1998 quarter of $2,529,000.
The above increases are principally due to the 1998 investments, which
consist of the shopping center acquisition in Blaine, Washington, in
addition to the master leasehold interest in the shopping center in Dublin,
California.
Interest income increased $315,000 to $429,000 for the quarter ended June 30,
1999, from the comparable 1998 quarter of $114,000. This increase is due
primarily to the two mortgage notes receivable the Company originated during
1998.
Income from the Company's unconsolidated real estate subsidiary was $138,000
and minority interest was $399,000 for the quarter ended June 30, 1999. There
was no comparable income or minority interest for the quarter ended June 30,
1998. The income from unconsolidated real estate subsidiary relates to the
Company's acquisition of the Kienow's portfolio during the fourth quarter of
1998. The minority interest represents the income allocation to the holders
of Operating Partnership Units in the Western/Kienow's L.P. downREIT.
Other income increased $112,000 to $311,000 for the quarter ended June 30,
1999, from the comparable 1998 quarter of $199,000. This increase is due
primarily to fees earned in connection with the Walnut Creek redevelopment.
The Company entered into this agreement during the second quarter of 1998.
Interest expense increased $192,000 to $3,516,000 for the quarter ended June
30, 1999, from the comparable 1998 quarter of $3,324,000 due to the increase
in the outstanding balance under the Bank Line as a result of funding the
1998 real estate investments.
Other operating expenses increased $266,000 to $1,293,000 for the quarter
ended June 30, 1999, from the comparable 1998 amount of $1,027,000. This
increase is primarily due to the master lease payments on the Dublin shopping
center investment the Company entered into during the third quarter of 1998.
18
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net income increased $2,955,000 to $7,975,000 for the six months ended June
30, 1999 from $5,020,000 for the comparable period in 1998. On a per share
basis (calculated using diluted weighted average shares outstanding), net
income increased $0.17 to $0.46 for the six months ended June 30, 1999 from
$0.29 for the comparable period in 1998. This increase in net income is
principally due to gains of $2,113,000 realized from the sale of three
properties. Other contributing factors to the increase include increased
minimum rent, recoveries from tenants, interest income, income from
unconsolidated real estate subsidiary and other income partially offset by
increased interest expense, property operating costs, other operating
expenses and minority interest.
- - Minimum rents increased $1,584,000 to $22,100,000 for the six months ended
June 30, 1999, from the comparable 1998 period of $20,516,000.
- - Recoveries from tenants increased $657,000 to $4,429,000 for the six months
ended June 30, 1999, from the comparable 1998 period of $3,772,000.
- - Property operating costs increased $661,000 to $4,761,000 for the six
months ended June 30, 1999, from the comparable 1998 period of $4,100,000.
The above increases are principally due to the 1998 investments, which
consist of the shopping center acquisitions in Modesto and Windsor,
California, and Blaine, Washington, in addition to the master leasehold
interest in the shopping center in Dublin, California.
Interest income increased $693,000 to $871,000 for the six months ended June
30, 1999, from the comparable 1998 period of $178,000. This increase is due
primarily to the two mortgage notes receivable the Company originated during
1998.
Income from the Company's unconsolidated real estate subsidiary was $145,000
and minority interest was $802,000 for the six months ended June 30, 1999.
There was no comparable income or minority interest for the six months ended
June 30, 1998. The income from unconsolidated real estate subsidiary relates
to the Company's acquisition of the Kienow's portfolio during the fourth
quarter of 1998. The minority interest represents the income allocation to
the holders of Operating Partnership Units in the Western/Kienow's L.P.
downREIT.
Other income increased $135,000 to $430,000 for the six months ended June 30,
1999, from the comparable 1998 amount of $295,000. This increase is due
primarily to fees earned in connection with the Walnut Creek redevelopment.
Interest expense increased $777,000 to $7,050,000 for the six months ended
June 30, 1999, from the comparable 1998 amount of $6,273,000 due to the
increase in the outstanding balance under the Bank Line as a result of
funding the 1998 real estate investments.
Other operating expenses increased $413,000 to $2,435,000 for the six months
ended June 30, 1999, from the comparable period in 1998 amount of $2,022,000.
This increase is primarily due to the master lease payments on the Dublin
shopping center investment the Company entered into during the third quarter
of 1998.
19
<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 June 30, 1999, a significant portion
of the Company's Local Area Network and Wide Area Network are Year 2000
compliant.
During 1998 and 1999, the Company undertook the conversion and upgrade of its
management information systems. The Company expects to spend approximately
$600,000 on this by the end of 1999. It is anticipated that the new system
will support planned future growth and increase efficiencies relating to
property operations. These costs will be recorded as assets and amortized.
Additionally, the Company undertook 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. Based on the results of this survey, the Company does not expect
its operations to be significantly impacted. However, contingency plans are
being considered in order to attempt to mitigate any potential disruption to
business operations as a result of non-compliant systems utilized by third
parties.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1 - 3 None
Item 4. Submission of Matters to a Vote of Security Holders
At the regular Annual Meeting of Shareholders of Western Investment Real Estate
Trust, held on May 13, 1999, the following matters were submitted to a vote of
security holders:
(a) The election of the following trustees to serve for a term of three
years expiring at the conclusion of the 2002 annual meeting of
shareholders: Bradley N. Blake, L. Michael Foley, and James L. Stell.
Bradley N. Blake: Approved - 15,855,122 shares were voted in favor and
136,972 shares withheld authority to vote.
L. Michael Foley: Approved - 15,854,411 shares were voted in favor and
137,683 shares withheld authority to vote.
James L. Stell: Approved - 15,812,980 shares were voted in favor and
179,114 shares withheld authority to vote.
(b) Ratification of the appointment of KPMG Peat Marwick LLP, independent
certified public accountants, as the Company's auditors for the year
ending December 31, 1999.
Approved - 15,868,361 shares were voted in favor, 70,166 shares were
voted against, and 53,567 shares abstained from voting.
Item 5. None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
(3) Declaration of Trust, as amended (filed as Exhibit 3 to
Registrant's 10-Q for the quarter ended September 30,
1998, and incorporated herein by reference).
(4.1) Form of Indenture relating to the Senior Notes (filed as
Exhibit 4.1 to Registration Statement on Form S-3 No.
33-71270 and incorporated herein by reference).
21
<PAGE>
(4.2) Form of Senior Notes (filed as Exhibit 4.2 to
Registration Statement on Form S-3 No. 33-71270 and
incorporated herein by reference).
(4.3) Form of Supplemental Indenture relating to the 7.1%
Senior Notes (filed as Exhibit 4.5 on Form 8-K, dated
September 24, 1997, and incorporated herein by
reference).
(4.4) Form of Supplemental Indenture relating to the 7.2%
Senior Notes (filed as Exhibit 4.6 on Form 8-K, dated
September 24, 1997, and incorporated herein by
reference).
(4.5) Form of Supplemental Indenture relating to the 7.3%
Senior Notes (filed as Exhibit 4.7 on Form 8-K, dated
September 24, 1997, and incorporated herein by
reference).
(10.1) Company's Nonqualified Stock Option Plan (filed as
Exhibit 4.2 to Registration Statement on Form S-8 No.
33-27016 and incorporated herein by reference).
(10.2)** Compensation Agreement (filed as Exhibit 10.3 to
Registrant's 10-K for the quarter ended December 31,
1997, and incorporated herein by reference).
(10.3)** Management Contracts (filed as Exhibit 10.4 to
Registrant's 10-Q for the quarter ended March 31, 1998,
and incorporated herein by reference).
(10.4)** Company's 1998 Equity Incentive Plan (filed as Exhibit
10.4 to Registrant's 10-Q for the quarter ended June 30,
1998, and incorporated herein by reference).
(10.5)** Stock Purchase and Contribution agreement dated
September 29, 1998 (filed as Exhibit 10.5 to
Registrant's 10-Q for the quarter ended September 30,
1998, and incorporated herein by reference).
(10.6) Agreement of Limited Partnership of Western/Kienow's,
L.P. dated October 30, 1998 (filed as Exhibit 10.6 to
Registrant's 10-Q for the quarter ended September 30,
1998, and incorporated herein by reference).
22
<PAGE>
(27)* Financial Data Schedule
(b) Reports on Form 8-K
None.
- --------------------------------------------------------------------------------
* Filed with this report
** Management contract or compensatory plan or arrangement.
23
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN INVESTMENT REAL ESTATE TRUST
------------------------------------
(Registrant)
By: /s/ Dennis D. Ryan
----------------------------
Dennis D. Ryan
Executive Vice President,
Chief Financial Officer
and Trustee
Dated: August 10, 1999
----------------
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S STATEMENT OF INCOME FOR THE MONTHS ENDED JUNE 30, 1999 AND THE
BALANCE SHEET AT JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1102
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 413297
<DEPRECIATION> 88321
<TOTAL-ASSETS> 414625
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 209818
0
0
<COMMON> 242132
<OTHER-SE> (63810)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 414625
<SALES> 0
<TOTAL-REVENUES> 28349
<CGS> 0
<TOTAL-COSTS> 7196<F4>
<OTHER-EXPENSES> 7439<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7050
<INCOME-PRETAX> 7975
<INCOME-TAX> 0
<INCOME-CONTINUING> 7975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7975
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.46
<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 (4761) AND OTHER OPERATING
EXPENSES (2435)
<F5>AMOUNT COMPRISED OF DEPRECIATION EXPENSE (5925) AND GENERAL AND
ADMINISTRATIVE EXPENSE (1514).
</FN>
</TABLE>
