<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR 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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-2809
WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-6100058
- ----------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
-------------------
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. [ ]
The aggregate market value of the voting shares held by nonaffiliates of the
registrant on March 1, 1999, based on the reported closing sales price of the
Company's shares of beneficial interest on the American Stock Exchange on such
date, was $184,171,000. (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 - 17,216,550
shares as of March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's proxy statement with respect to its 1999 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>
PART I PAGE
----
<S> <C> <C>
Item 1 Business 4-18
Item 2 Properties 18-22
Item 3 Legal Proceedings 23
Item 4 Submission of Matters to a Vote of Security Holders 23
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 23
Item 6 Selected Financial Data 24
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 25-32
Item 7A Quantitative and Qualitative Disclosures About Market Risk 32-33
Item 8 Consolidated Financial Statements 34-57
Consolidated Financial Statement Schedule 58-59
Additional Information: 1998 Building Improvement and Leasing Related Cost Additions (unaudited) 60
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 61
PART III
Item 10 Directors and Executive Officers of the Registrant 61
Item 11 Executive Compensation 61
Item 12 Security Ownership of Certain Beneficial Owners and Management 61
Item 13 Certain Relationships and Related Transactions 62
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 62-64
Consent of Independent Certified Public Accountants 65
Signatures 66
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Western Investment Real Estate Trust ("Western") is a real estate investment
trust ("REIT") and qualifies as such under Sections 856 and 960 of the Internal
Revenue Code. Western was organized under the laws of the State of California in
1962 and commenced real estate operations in 1964.
In order that Western may continue to qualify as a REIT: (i) it must be taxable
as a domestic entity, (ii) the beneficial ownership must be 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 represented by real estate
assets, cash and government securities, and (vi) it 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, Western is permitted to invest its
funds in the ownership of real estate, mortgages, deeds of trust and certain
financial instruments as permitted by law. Substantially all of Western's
funds have been invested in the ownership of real estate.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Western evaluates performance and makes resource-allocation decisions on an
individual property basis. For financial reporting purposes, Western 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).
(c) NARRATIVE DESCRIPTION OF BUSINESS.
Western; Western/Kienow's L.P., a Delaware limited partnership; a joint
venture in which Western has a controlling financial interest as of December
31, 1998; and Western's wholly owned subsidiary, WIRET Asset Management
Services (a California corporation and a licensed real estate broker in the
State of California) (collectively, "the Company"), is in the business of
acquiring, managing, leasing and developing retail, commercial and industrial
properties. Western is the sole general partner in Western/Kienow's L.P. and
owned a 60% interest as of December 31, 1998. The Company employed 54 people
at December 31, 1998.
Through an unconsolidated real estate subsidiary, Western owns and manages 10
retail properties comprising 449,217 square feet of gross leasable area
("GLA"). Throughout this 10-K document reference to the unconsolidated real
estate subsidiary is with regard to this 10 property portfolio. The combined
gross leasable area (GLA) at December 31, 1998 was 5.7 million square feet.
4
<PAGE>
The Company's executive office is located in the San Francisco Bay Area at 2200
Powell Street, Suite 600, Emeryville California, 94608, and can be reached at
(510) 597-0160. Additionally, the Company maintains regional offices in Granite
Bay and Fresno, California and Portland, Oregon.
THE PROPERTIES
As of December 31, 1998, the Company (and its unconsolidated real estate
subsidiary) had 66 real estate investments which were comprised of 52 properties
owned directly, 1 investment in a joint venture, 3 notes secured by real estate
and 10 properties owned by an unconsolidated real estate subsidiary of the
Company.
Effective October 30, 1998 the Company acquired control of Kienow's Food Stores,
Inc. ("Kienow's") whose principal assets are real estate properties (see Note
5 to consolidated financial statements). Ten of the seventeen properties
acquired will be converted to rental properties, the remaining seven will be
sold. The acquisition was accomplished using a newly formed DownREIT limited
partnership structure. The Company consolidates the DownREIT limited partnership
which accounts for its investment in Kienow's on the equity basis. The following
information, unless otherwise indicated, includes the ten Kienow's properties to
be retained. The portfolio at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Unconsolidated Real
The Company Estate Subsidiary Combined
------------------------- ------------------------- -------------------------
Gross Gross Gross
No. of Leasable No of Leasable No. of Leasable
Investments Area Investments Area Investments Area
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shopping centers 40 4,713,673 (1) 6 376,063 46 5,089,736
Single-tenant retail 5 299,742 4 73,154 9 372,896
-- --------- --- ------- -- ---------
Sub-total 45 5,013,415 10 449,217 55 5,462,632
Commercial and other 11 234,985 --- --- 11 234,985
-- --------- --- ------- -- ---------
Total 56 5,248,400 10 449,217 (2) 66 5,697,617
== ========= === ======= == =========
</TABLE>
(1) Included in Shopping Center Gross Leasable Area is 153,175 of square feet
relating to a property under master lease. During 1998, the Company
entered into a master leasehold interest in this property located in
Dublin, California, that provides an option to purchase the property at a
fixed price during the first quarter of 2001. Under the master lease,
Western has full control of all leasing, management and capital
expenditures decisions for the property. As part of the transaction,
Western funded an $8.2 million, 8.5% fixed-rate first trust-deed loan
secured by the property.
(2) This total does not include 7 properties held for sale, representing
96,278 GLA, owned by an unconsolidated real estate subsidiary of the
Company. Four of these properties were sold by March 1, 1999.
The average size of neighborhood and community shopping centers and other retail
properties owned by the Company and subsidiary at December 31, 1998 was
approximately 120,000 square feet of gross leasable area ("GLA").
5
<PAGE>
The Company (and its unconsolidated real estate subsidiary) leases a substantial
portion of its total GLA on a long-term, triple net basis. As of December 31,
1998, approximately 58% of total retail GLA was leased to anchor tenants. Of
this space, 70% was leased to anchor tenant grocery or drug stores.
Additionally, as of that date, approximately 73% of the Company's (and its
unconsolidated real estate subsidiary's) Annualized Base Rent (as herein
defined) was derived from national or regional retail tenants. The following
tables set forth, as of December 31, 1998, certain information with respect to
the properties owned by the Company (and its unconsolidated real estate
subsidiary):
6
<PAGE>
Shopping Centers & Retail-Anchor/Non-Anchor
<TABLE>
<CAPTION>
Unconsolidated Company
real estate portfolio
Company subsidiary Percentage monthly
portfolio portfolio Combined of base
Type of Tenant Space (5) GLA GLA (1) GLA (1) GLA rent (2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Anchor 3,137,379 49,323 3,186,702 58% $1,810,086
Non-anchor 1,521,045 175,369 1,696,414 31% $1,827,825
- ---------------------------------------------------------------------------------------------------------------
Sub-total 4,658,424 224,692 4,883,116 89% $3,637,911
- ---------------------------------------------------------------------------------------------------------------
Occupied & Operating as Kienow's Food Store --- 205,276 205,276 4%
Unleased 354,991 19,249 374,240 7%
- ---------------------------------------------------------------------------------------------------------------
Total 5,013,415 449,217 5,462,632 100%
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Unconsolidated Annualized
real estate base
subsidiary Percentage rent
portfolio Combined Annualized of per
monthly monthly base rent annualized leased
base rent base rent leased base square
Type of Tenant Space (5) (1)(2)(3) (1)(2)(3) space (4) rent foot
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Anchor $ 16,583 $1,826,669 $21,920,028 49% $ 6.88
Non-anchor $101,707 $1,929,532 $23,154,384 51% $13.65
- ---------------------------------------------------------------------------------------------------------------
Sub-total $118,290 $3,756,201 $45,074,412 100% $ 9.23
- ---------------------------------------------------------------------------------------------------------------
Occupied & Operating as Kienow's Food Store
Unleased
- --------------------------------------------------------------------------------------------------------------
Total
==============================================================================================================
</TABLE>
Shopping Centers and Retail-National/Regional/Local
<TABLE>
<CAPTION>
Unconsolidated Company
real estate portfolio
Company subsidiary Percentage monthly
portfolio portfolio Combined of base
Type of Tenant Space (6) GLA GLA (1) GLA (1) GLA rent (2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
National 2,930,452 46,835 2,977,287 55% $1,967,527
Regional 894,102 24,705 918,807 17% $ 745,638
Local 833,870 153,152 987,022 18% $ 924,746
- ---------------------------------------------------------------------------------------------------------------
Sub-total 4,658,424 224,692 4,883,116 89% $3,637,911
- ---------------------------------------------------------------------------------------------------------------
Occupied & Operating as Kienow's Food Store --- 205,276 205,276 4%
Unleased 354,991 19,249 374,240 7%
- -------------------------------------------------------------------------------------------------------------
Total 5,013,415 449,217 5,462,632 100%
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Unconsolidated Annualized
real estate base
subsidiary Percentage rent
portfolio Combined Annualized of per
monthly monthly base rent annualized leased
base rent base rent leased base square
Type of Tenant Space (6) (1)(2)(3) (1)(2)(3) space (4) rent foot
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
National $ 16,927 $1,984,454 $23,813,448 53% $ 8.00
Regional $ 21,013 $ 766,651 $ 9,199,812 20% $10.01
Local $ 80,350 $1,005,096 $12,061,152 27% $12.22
- ---------------------------------------------------------------------------------------------------------------
Sub-total $118,290 $3,756,201 $45,074,412 100% $ 9.23
- ---------------------------------------------------------------------------------------------------------------
Occupied & Operating as Kienow's Food Store
Unleased
- -----------------------------------------------------------------------------------------------------------------
Total
=================================================================================================================
</TABLE>
(1) Excludes non-core portfolio and leaseholds held by unconsolidated real
estate subsidiary.
(2) "Monthly base rent" represents the minimum monthly rent in effect on
December 31, 1998.
(3) Excludes monthly base rent for GLA operating & occupied by Kienow's Food
Stores.
(4) "Annualized Base Rent" represents the annualized minimum monthly rent in
effect on December 31, 1998.
(5) Tenants leasing 10,000 square feet or more are defined as "Anchor" tenants.
(6) "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.
7
<PAGE>
The combined portfolios of the Company (and its unconsolidated real estate
subsidiary) of 63 properties at December 31, 1998 is summarized as follows:
Shopping Centers, Retail and Commercial
<TABLE>
<CAPTION>
Unconsol-
Unconsolidated Company idated real
Company real portfolio estate
portfolio estate Combined Percentage monthly subsidiary
GLA Subsidiary GLA(1) of GLA(1) base portfolio
portfolio rent(2) monthly
GLA (1) base
rent
(1)(2)(3)
Total Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shopping Centers (exclusive of Kienow's occupied &
operating stores) 4,713,673 243,941 4,957,614 87% $3,769,174 $118,290
Shopping Center space occupied by operating Kienow's
Grocery --- 132,122 132,122 2% --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total Shopping Center 4,713,673 376,063 5,089,736 89% $3,769,174 $118,290
==================================================================================================================================
Single Tenant Retail (exclusive of Kienow's occupied &
operating stores) 299,742 --- 299,742 6% 151,491 $ ---
Single Tenant Retail space occupied by operating Kienow's
Grocery --- 73,154 73,154 1% --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total Single Tenant Retail 299,742 73,154 372,896 7% $ 151,491 ---
==================================================================================================================================
Commercial 234,985 --- 234,985 4% $ 291,671 $ ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total 5,248,400 449,217 5,697,617 100% $4,212,336 $118,290
==================================================================================================================================
<CAPTION>
Combined Annualized Annualized
monthly base rent Percent of base rent
base rent leased Annualized per leased
Total Portfolio (1)(2)(3) space (4) base rent square foot
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shopping Centers (exclusive of Kienow's occupied &
operating stores) $3,887,464 $46,649,568 90% $9.41
Shopping Center space occupied by operating Kienow's
Grocery --- --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Total Shopping Center $3,887,464 $46,649,568 90% $9.41
====================================================================================================================
Single Tenant Retail (exclusive of Kienow's occupied &
operating stores) $ 151,491 $1,817,892 3% $6.06
Single Tenant Retail space occupied by operating Kienow's
Grocery --- --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Total Single Tenant Retail 151,491 $1,817,892 3% $6.06
====================================================================================================================
Commercial 291,671 $3,500,050 7% $14.89
- --------------------------------------------------------------------------------------------------------------------
Total $4,330,626 $51,967,510 100% $9.24
====================================================================================================================
</TABLE>
(1) Excludes non-core portfolio and leaseholds held by unconsolidated real
estate subsidiary.
(2) "Monthly base rent" represents the minimum monthly rent in effect on
December 31, 1998.
(3) Excludes monthly base rent for GLA operating & occupied by Kienow's Food
Stores.
(4) "Annualized Base Rent" represents the annualized minimum monthly rent in
effect on December 31, 1998.
8
<PAGE>
The following table summarizes the composition of the real estate investments
owned by the Company and its unconsolidated real estate subsidiary as of
December 31, 1998 by type based on amounts invested:
<TABLE>
<CAPTION>
Company Portfolio
Percentage
Number of Amount of of
Investments Investments(1) Investment
- ----------------------------------------------- -------------- ---------------- ------------
<S> <C> <C> <C>
Property Types
Real Estate Investments
Shopping Centers 37 $395,387 93%
Single Tenant Retail 2 3,649 1%
Commercial 5 11,147 3%
Mortgage Notes 3 16,160 4%
- ----------------------------------------------- -------------- ---------------- ------------
47 $426,343 96%
=============================================== ============== ================ ============
Real Estate Properties Held for Sale
Shopping Centers 1 $ 2,032 7%
Single Tenant Retail 3 10,549 35%
Commercial 5 17,707 58%
- ----------------------------------------------- -------------- ---------------- ------------
9 $30,288 100%
=============================================== ============== ================ ============
Total Portfolios
Shopping Centers 38 $397,419 84%
Single Tenant Retail 5 14,198 3%
Commercial 10 28,854 6%
Mortgage Notes 3 30,288 6%
- ----------------------------------------------- -------------- ---------------- ------------
56 $470,759 100%
=============================================== ============== ================ ============
Unconsolidated Real Estate Subsidiary Portfolio
Percentage
Number of Amount of of
Investments Investments(1) Investment
- ----------------------------------------------- ------------------ ---------------- -------------
<S> <C> <C> <C>
Property Types
Real Estate Investments
Shopping Centers 8 $ 27,287(2) 69%
Single Tenant Retail 4 12,439 31%
Commercial --- --- 0%
Mortgage Notes --- --- 0%
- ----------------------------------------------- ------------------ ---------------- -------------
12 $ 39,726 100%
=============================================== ================== ================ =============
Real Estate Properties Held for Sale
Shopping Centers --- ---
Single Tenant Retail --- ---
Commercial 7 4,613 100%
- ----------------------------------------------- ------------------ ---------------- -------------
7 $ 4,613 100%
=============================================== ================== ================ =============
Total Portfolios
Shopping Centers 8 $27,287(2) 62%
Single Tenant Retail 4 12,439 28%
Commercial 7 4,613 10%
Mortgage Notes --- --- 0%
- ----------------------------------------------- ------------------ ---------------- -------------
19(3) $44,339 100%
=============================================== ================== ================ =============
</TABLE>
(1) Reflects the original cost plus capital improvements, before depreciation
and amortization.
(2) Includes Subsidiary investment in 2 leasehold properties.
(3) These 19 properties are comprised of 10 core retail properties,
7 available for sale commercial properties and 2 retail property
leasehold interests
9
<PAGE>
The following table summarizes the composition of Leasable Square Feet
and Occupancy Percentage as of December 31, 1998, by "Same Store" properties
versus real estate acquired during 1998.
<TABLE>
<CAPTION>
Unconsolidated Real Estate
Company Portfolio Subsidiary Portfolio
Number of Leasable Square Occupancy Number of Leasable Square Occupancy
Property Types Investments Feet Percentage(1) Investments Feet Percentage(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
"Same Store" Real Estate
Investments (2)
Shopping centers 35 4,091,654 93.2% --- --- ---
Single-tenant retail 5 299,742 100.0% --- --- ---
Commercial & other 11 234,985 96.1% --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
51 4,626,381 93.8% --- --- ---
==================================================================================================================================
Real Estate Investments Acquired
During 1998
Shopping centers 5 622,019 87.7% 6 376,063 59.7%
Single-tenant retail --- --- --- 4 73,154 0.0%
- ----------------------------------------------------------------------------------------------------------------------------------
5 622,019 87.7% 10 449,217 49.9%
==================================================================================================================================
Combined 56 5,248,400 93.1% 10 449,217 49.9%
==================================================================================================================================
</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) "Same Store" real estate investments include those investments owned for
the entire two-year period ended December 31, 1998.
10
<PAGE>
<TABLE>
<CAPTION>
Weighted Average Age of the Company's Real Estate Properties
---------------------------------- ----------------- -----------------
Weighted
Property Number of Average Age
Type Investments (1) (in years) (2)
---------------------------------- ----------------- -----------------
<S> <C> <C>
Shopping centers 38 14.3
Single-tenant retail 5 19.5
Commercial 10 15.9
- ------------------------------------------ ------ -------------------
Total/Weighted Average 53 15.0
========================================== ====== ===================
</TABLE>
(1) This table does not include the Company's 3 investments in mortgages.
(2) 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 of the areas
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. If the
number of prospective buyers for the types of properties the Company considers
acquiring increases, the prices of such properties may increase and the
yields may 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 tenants include substantial, well-recognized retailers
such as Food-4-Less, Nob Hill Foods, Pak 'N Save, Raley's, Rite Aid
(Thrifty-Payless), Safeway and Save Mart Supermarkets.
11
<PAGE>
At December 31, 1998, Raley's (including its subsidiary, Nob Hill Foods) was
the Company's most significant tenant. A grocery and drug retailer, it was a
lessee in 22 of the Company's properties and accounted for 20% of the
Company's 1998 total revenues. Raley's, a privately owned company, currently
operates 116 stores in Northern California and Nevada. The Raley's
organization has provided audited financial statements to the Company
indicating that its sales exceeded $2.2 billion in its fiscal year ending
June 27, 1998. In addition to the audited financial statements, which the
Company uses to monitor Raley's financial position and results of operations,
the Company receives monthly sales reports for properties leased to Raley's
and uses this information to monitor store performance. 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, 1998, the Company's Senior Notes carry
"investment grade" ratings from Moody's Investors Service (Baa3) and Standard
& Poor's (BBB-).
The following table provides the location, size and expiration of the Raley's
and Nob Hill leases:
<TABLE>
<CAPTION>
Lease
Location Gross Leasable Area Expiration Date
------------- ------------------- ---------------
<S> <C> <C> <C>
1. Watsonville, CA 26,500 8/12/02
2. Fallon, NV 0 (1) 6/30/03
3. Modesto, CA 49,800 5/31/04
4. Fair Oaks, CA 59,231 3/31/06
5. Yuba City, CA 61,842 9/01/08
6. Carson City, NV 59,018 8/31/12
7. Redding, CA 60,000 5/31/14
8. Yreka, CA 60,000 11/30/14
9. Chico, CA 61,046 4/30/15
10. Winnemucca, NV 63,024 12/31/15
11. Fallon, NV 60,114 2/28/16
12. Reno, NV 61,046 3/31/16
13. Ukiah, CA 61,046 6/30/16
14. Elko, NV 61,000 1/31/17
15. Vallejo, CA 60,114 9/30/17
16. Folsom, CA 60,114 12/31/17
17. Turlock, CA 60,114 2/28/18
18. Grass Valley, CA 60,114 4/30/18
19. Granite Bay, CA 60,114 6/30/18
20. Suisun City, CA 60,114 5/31/19
21. Oroville, CA 59,885 6/01/19
22. Hollister, CA 47,915 11/21/19
</TABLE>
(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.
12
<PAGE>
The following table summarizes information on the Company's ten most significant
tenants as of December 31, 1998:
<TABLE>
<CAPTION>
Company Percentage
Number GLA Percentage of of Total
Tenant of Stores (Square Feet) Company GlA Revenue
------ --------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Raley's................................. 23 (1) 1,253,164 25% 20%
Safeway/Pak `N Save..................... 4 193,403 4% 4%
Home Savings of America................. 6 76,193 2% 4%
Save Mart............................... 7 228,678 4% 3%
Rite Aid(Thrifty-PayLess ).............. 12 304,984 6% 3%
Food-4-Less (Fleming Foods)............. 3 142,625 3% 2%
Blockbuster Video....................... 7 42,228 1% 1%
Scolari's Supermarkets.................. 1 50,451 1% 1%
Hollywood Video......................... 5 32,394 1% 1%
Heald College........................... 1 47,150 1% 1%
--------- --- ---
Total.............................. 2,371,270 48% 40%
========= === ===
</TABLE>
(1) As of December 31, 1998, 22 of the Company's properties were subject to
lease agreements with Raley's (and it's subsidiary Nob Hill Foods).
During the 12 months ended December 31, 1998, the Company received
rental income from this tenant in connection with lease agreements
covering 23 of the Company's properties. During 1998, the Company
disposed of one of the properties (Nob Hill Foods located in
Newman, California.
No single property investment accounted for more than 4.3% of the Company's
total revenues in 1998.
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. 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.
13
<PAGE>
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, (except for the Windsor, California, property where
the secured lender requires earthquake insurance) 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 in the area of the earthquake 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 for its properties. To date, the Company has not purchased earthquake
insurance because of: (i) the high premiums and deductibles (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 pages set forth information with respect to anchor
and non-anchor tenant lease expirations as of December 31, 1998:
14
<PAGE>
ANCHOR TENANTS (1) OF THE COMPANY
<TABLE>
<CAPTION>
Annualized Average Base
Gross Percentage of Base Rent Rent Per
Number of Leasable Total Leased Under Square Foot
Lease Year Leases Area Gross Leasable Expiring of Leases
Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring
---------- ------------ -------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1999.................................... 1 103,284 3.1% $ 280,500 $ 2.72
2000.................................... 7 117,912 3.5% 1,482,252 12.57
2001.................................... 6 191,231 5.7% 951,708 4.98
2002.................................... 5 93,110 2.8% 381,324 4.10
2003.................................... 10 242,728 7.3% 1,660,368 6.84
2004.................................... 6 139,607 4.2% 978,276 7.01
2005.................................... 2 73,518 2.2% 713,568 9.71
2006.................................... 5 220,186 6.6% 1,645,128 7.47
2007.................................... 2 43,904 1.3% 479,016 10.91
2008.................................... 5 154,687 4.6% 1,505,964 9.74
Thereafter.............................. 45 1,948,267 58.5% 15,791,137 8.11
-- --------- ------ ----------- -----
Total/Weighted Average................. 94 3,328,434 100.0% $25,869,241 $ 7.77
== ========= ====== =========== =====
</TABLE>
NON-ANCHOR TENANTS OF THE COMPANY
<TABLE>
<CAPTION>
Average Base
Gross Percentage of Annualized Base Rent Per
Number of Leasable Total Leased Rent 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......................... 36 52,454 3.4% $ 780,192 $14.87
1999................................... 110 221,840 14.3% 2,975,681 13.41
2000................................... 123 231,852 14.9% 3,421,874 14.76
2001................................... 123 226,813 14.6% 3,243,420 14.30
2002................................... 83 201,379 12.9% 3,085,705 15.32
2003................................... 110 257,171 16.5% 4,265,952 16.59
2004................................... 27 76,149 4.9% 1,178,796 15.48
2005................................... 16 64,774 4.2% 925,236 14.28
2006................................... 6 18,874 1.2% 432,132 22.90
2007................................... 13 42,720 2.7% 937,296 21.94
2008................................... 13 54,593 3.5% 905,292 16.58
Thereafter............................. 35 107,134 6.9% 2,329,980 21.75
--- --------- ------ ----------- ------
Total/Weighted Average................. 695 1,555,753 100.0% $24,481,556 $15.74
=== ========= ====== =========== ======
</TABLE>
(1) Anchor tenants are defined as tenants leasing 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.
15
<PAGE>
<TABLE>
<CAPTION>
LEASE EXPIRATION DATA FOR ANCHOR (1) AND NON-ANCHOR
TENANTS OF THE COMPANY
-------------------------------------------------------------------------------------------------
Percentage of
Total
Leased Annualized
Gross Gross Base Rent
Number of Leasable Leasable Under Average Base Rent Per
Lease Year Leases Area Area Expiring Square Foot of Expiring
Expiration Expiring (2) Expiring Expiring Leases (3) Leases
---------- ----------- ------------ -------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
month-to-month 36 52,454 1.07% $ 780,192 $14.87
1999 111 325,124 6.66% 3,256,181 10.02
2000 130 349,764 7.16% 4,904,126 14.02
2001 129 418,044 8.56% 4,195,128 10.04
2002 88 294,489 6.03% 3,467,029 11.77
2003 120 499,899 10.24% 5,926,320 11.86
2004 33 215,756 4.42% 2,157,072 10.00
2005 18 138,292 2.83% 1,638,804 11.85
2006 11 239,060 4.89% 2,077,260 8.69
2007 15 86,624 1.77% 1,416,312 16.35
2008 18 209,280 4.28% 2,411,256 11.52
Thereafter 80 2,055,401 42.08% 18,121,117 8.82
------ --------- ------- ----------- ------
Total/Weighted
Average 790 4,884,187(4) 100.00% $50,350,798 $10.31
====== ========= ======= =========== ======
</TABLE>
<TABLE>
<CAPTION>
LEASE EXPIRATION DATA FOR ANCHOR (1) AND NON-ANCHOR
TENANTS OF THE UNCONSOLIDATED REAL ESTATE SUBSIDIARY
------------------------------------------------------------------------------------------------
Percentage of
Total
Leased Annualized
Gross Gross Base Rent
Number of Leasable Leasable Under Average Base Rent Per
Lease Year Leases Area Area Expiring Square Foot of Expiring
Expiration Expiring (2) Expiring Expiring Leases (3) Leases
---------- ----------- ------------ -------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
month-to-month 19 47,466 21.15% $290,190 $6.11
1999 12 18,480 8.23% 147,415 7.98
2000 17 38,757 17.27% 270,878 6.99
2001 5 23,263 10.37% 145,512 6.26
2002 7 47,600 21.21% 251,616 5.29
2003 1 6,385 2.85% 20,400 3.19
2004 3 9,687 4.32% 112,920 11.66
2005 2 8,015 3.57% 104,400 13.03
2006 -- -- -- 0.00
2007 1 8,967 4.00% 39,600 4.42
2008 -- -- -- -- 0.00
Thereafter 1 15,796 7.04% 84,095 5.32
------ --------- ------- ----------- ------
Total/Weighted
Average 68 224,416(5) 100.00% $1,467,026 $6.54
====== ========= ======= =========== ======
</TABLE>
(1) Anchor tenants are defined as tenants leasing 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 364,213 square feet GLA of unleased space (354,991
square feet GLA of shopping center and 9,222 square feet GLA of
commercial).
(5) Total does not include 132,122 square feet GLA of space occupied and
operating as Kienow's, neither does it include 19,249 square feet of GLA of
unleased space.
16
<PAGE>
PROPERTY OPERATIONS
The Company is a fully integrated REIT that provides full property operation
services to all but two of its properties. Property services includes
property management, marketing and leasing services. Direct property
management provides for regular interaction between the Company and its
tenants and close supervision of its properties.
In order to facilitate its present and future property operating activities,
the Company maintains three branch offices which are centrally located to the
properties. The offices are located in Granite Bay, and Fresno, California;
and Portland, Oregon.
Direct 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 Company's
markets. The Company believes the cost of direct 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.
One of the Company's properties is managed by an independent property manager
and one property is managed by the Company's joint venture partner.
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 Serra Center and has
been managing the property for approximately 20 years. Gramor Development
Washington, LLC, provides management services for the partnership's shopping
center, located in Blaine, Washington, for fees equal to 4% of gross rents.
In the event the operating return of the property is not adequate to provide
the Company its preferential return, management fees are limited to $2,000
per month for such period. With the exception of Gramor Development, none 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 current owner and potentially on the part of the prior
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.
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
17
<PAGE>
not located under any of its current properties or any of the former
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.
18
<PAGE>
Item 2: Properties
<TABLE>
<CAPTION>
Minimum Rent
------------------ 12/31/98 Year Year Last
Name Location 1998 1997 Occupancy (1) Completed Renovated
----------------------------------- ----------------- ------- ------- ------------- -------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
I. Minimum Rents
Shopping Center
---------------
Anderson Square Anderson, CA $ 371 $ 350 95.33% 1979
Angel's Camp Town Center Angel's Camp, CA 598 595 98.51% 1986
Skypark Plaza Shopping Center Chico, CA 1,372 1,371 93.30% 1985 1991
Coalinga Shopping Center Coalinga, CA 298 293 74.95% 1977
Serra Center (30% interest) Colma, CA 531 467 100.00% 1972
Mercantile Row Shopping Center Dinuba, CA 745 770 98.93% 1990
Dublin Shopping Center Dublin, CA 288 - 69.14% 1970
Laguna 99 Shopping Center Elk Grove, CA 1,424 1,426 98.12% 1993
Northridge Shopping Center Fair Oaks, CA 714 763 92.60% 1958 1986
Commonwealth Square Shopping Center Folsom, CA 1,822 1,561 98.08% 1988
Victorian Walk Shopping Center Fresno, CA 775 804 91.41% 1982 1994
Country Gables Shopping Center Granite Bay, CA 1,413 1,245 99.14% 1988
Pinecreek Shopping Center Grass Valley, CA 1,000 952 96.09% 1988
Heritage Oak Shopping Center Gridley, CA 374 436 64.09% 1981
Centennial Plaza Shopping Center Hanford, CA 1,211 1,210 100.00% 1991
Plaza 580 Shopping Center Livermore, CA 1,492 1,444 98.52% 1993/1996
Canal Farms Shopping Center Los Banos, CA 869 849 94.12% 1988
Mission Ridge Shopping Center Manteca, CA 1,149 1,141 94.19% 1993
Century Center Modesto, CA 1,544 - 96.76% 1979
San Antonio Center (3) Mountain View, CA - 396 SOLD 1959 1990
Currier Square Shopping Center Oroville, CA 773 979 83.24% 1969 1989
Eastridge Plaza Shopping Center Porterville, CA 458 466 80.88% 1985
Belle Mill Landing Red Bluff, CA 690 699 88.24% 1982 1995
Cobblestone Shopping Center Redding, CA 901 919 85.53% 1981
Kmart Center Sacramento, CA 403 362 91.40% 1964 1986
Elverta Crossing Shopping Center Sacramento, CA 1,282 1,172 99.00% 1991 1993
Heritage Park Shopping Center Suisun, CA 1,517 1,400 90.02% 1989
Heritage Place Shopping Center Tulare, CA 968 888 97.20% 1986
Blossom Valley Plaza Turlock, CA 1,086 1,107 93.93% 1988 1991
Ukiah Crossroads Shopping Center Ukiah, CA 911 876 95.83% 1986
Park Place Shopping Center Vallejo, CA 1,546 1,577 87.48% 1987
Lakewood Village Windsor, CA 1,675 - 95.33% 1995
Yreka Junction Yreka, CA 851 708 98.37% 1984
Raley's Shopping Center Yuba City, CA 922 914 100.00% 1963 1995
Eagle Station Shopping Center Carson City, NV 907 857 93.54% 1982
</TABLE>
19
<PAGE>
Item 2: Properties (continued)
<TABLE>
<CAPTION>
Minimum Rent
---------------- 12/31/98 Year Year Last
Name Location 1998 1997 Occupancy (1) Completed Renovated
----------------------------------- ----------------- ------- ------- ------------- -------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Elko Junction Shopping Center Elko, NV 1,515 1,285 93.32% 1979/1994/1996
Dodge Center (4) Fallon, NV 270 224 100.00% 1976 1995
Caughlin Ranch Shopping Center Reno, NV 1,132 1,102 97.03% 1990 1991
North Hills Shopping Center Reno, NV 899 843 97.31% 1986
West Town Winnemuca, NV 462 461 100.00% 1978 1991
Blaine International Center Blaine, WA 243 - 86.78% 1991
------- -------
Sub-total - Shopping Center $37,398 $32,911
------- -------
Single Tenant
-------------
Carpeteria (3) Concord, CA $ 0 $ 133 SOLD 1963
Luckys (2) El Cerrito, CA 241 241 SOLD 1964 1983
Acapulco Y Los Arcos (3) Fresno, CA - 93 SOLD 1972
Nob Hill General Store (4) Hollister, CA 480 480 100.00% 1994
Nob Hill General Store (2) Newman, CA 305 313 SOLD 1995
Luckys (3) Santa Maria, CA - 15 SOLD 1962 1995
Nob Hill General Store (4) Watsonville, CA 195 195 100.00% 1982
Raley's Supermarket (4) Fallon, NV 401 401 100.00% 1991
------- -------
Sub-total - Single Tenant $ 1,622 $ 1,871
------- -------
Commercial
----------
Old Dominion (2) Commerce City, CO $102 $62 SOLD 1984 1995
Coast Savings & Loan (4) Cupertino, CA 216 216 100.00% 1980
Heald Business College (4) Milpitas, CA 513 513 100.00% 1987 1995
Coast Savings & Loan Monterey,CA 490 450 100.00% 1963
Redwood II (4) Petaluma, CA 99 25 77.90% 1985
Coast Savings & Loan (4) Salinas, CA 336 321 100.00% 1937
Coast Savings & Loan (Market St) San Francisco, CA 317 291 100.00% 1964
Coast Savings & Loan (Taraval St) San Francisco, CA 357 328 100.00% 1975
3450 California St San Francisco, CA 253 230 100.00% 1957 1987
Viking Freight Systems (4) Santa Clara, CA 454 443 100.00% 1978
Coast Savings & Loan Santa Cruz, CA 194 184 100.00% 1980
------- -------
Sub-total - Commercial $ 3,330 $ 3,063
------- -------
Total Minimum Rent $42,350 $37,845
======= =======
</TABLE>
20
<PAGE>
Item 2: Properties (continued)
<TABLE>
<CAPTION>
Percentage Rents
------------------ 12/31/98 Year Year Last
1998 1997 Occupancy (1) Completed Renovated
------- ------- ------------- -------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
II. Percentage Rent
SHOPPING CENTER/RETAIL
Anderson Square Anderson, CA $ 47 $ 45 95.33% 1979
Skypark Plaza Shopping Center Chico, CA 1 - 93.30% 1985
Coalinga Shopping Center Coalinga, CA 37 67 74.95% 1977
Northridge Shopping Center Fair Oaks, CA 25 48 92.60% 1958 1986
Commonwealth Square Shopping Center Folsom, CA 1 7 98.08% 1988
Victorian Walk Shopping Center Fresno, CA - 4 91.41% 1982 1994
Country Gables Shopping Center Granite Bay, CA 38 1 99.14% 1988
Pinecreek Shopping Center Grass Valley, CA 3 - 96.09% 1988
Heritage Oak Shopping Center Gridley, CA 31 39 64.09% 1981
Century Center Modesto, CA 144 - 96.76% 1979
Cobblestone Shopping Center Redding, CA 5 14 85.53% 1981
Kmart Center Sacramento, CA 41 62 91.40% 1964 1986
Heritage Park Shopping Center Suisun, CA 1 1 90.02% 1989
Blossom Valley Plaza Turlock, CA 11 - 93.93% 1988
Ukiah Crossroads Shopping Center Ukiah, CA 5 - 95.83% 1986
Park Place Shopping Center Vallejo, CA 6 9 87.48% 1987
Eagle Station Shopping Center Carson City, NV 13 21 93.54% 1982
Dodge Center (4) Fallon, NV 5 14 100.00% 1976 1995
Caughlin Ranch Shopping Center Reno, NV - 6 97.03% 1990 1991
Blaine International Center Blaine, WA 13 - 86.78% 1991
------- -------
Sub-total - Shopping Center $ 427 $ 338
------- -------
SINGLE TENANT
Kmart Center Napa, CA $57 $88 100.00% 1964
Luckys (3) Santa Maria, CA - 43 SOLD 1962 1995
Nob Hill General Stores (4) Watsonville, CA 55 83 100.00% 1982
------- -------
Sub-total - Single Tenant $ 112 $ 214
------- -------
Total Percentage Rent $ 539 $ 552
======= =======
</TABLE>
21
<PAGE>
Item 2: Properties (continued)
<TABLE>
<CAPTION>
Direct
Financing
Leases(5)
---------------- 12/31/98 Year Year Last
1998 1997 Occupancy (1) Completed Renovated
------- ------- ------------- -------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
III. Direct Financing Leases
Kmart Center (6) Napa, CA $27 $66 100.00% 1964
Viking Freight Systems (7) Santa Clara, CA 78 89 100.00% 1978
------- -------
Total Direct Financing Lease Income $ 105 $ 155
======= =======
</TABLE>
(1) Once a space is subject to an executed lease, the space is then included
in occupied space. A space continues to be included 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 1998.
(3) Sold in 1997.
(4) Property is being held for sale
(5) Included in Other Income.
(6) Kmart Center, Napa, California, is accounted for as a direct financing
lease. During 1998, the Company received $281,000 in minimum lease
payments, of which $27,000 comprised direct financing income and $254,000
is a non-revenue receipt accounted as principal reduction. 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. This lease expires January 1999.
(7) Viking Freight Systems, Santa Clara, California, is accounted for as a
direct financing lease. During 1998., the Company received $189,000 in
minimum lease payments, of which $78,000 comprised direct financing
income and $111,000 is a non-revenue receipt accounted as principal
reduction. 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. This lease
expires September 2003.
22
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal actions arising in the normal course of
business. After evaluation of these matters, including consideration of legal
counsel's evaluation, management is of the opinion that their outcome will not
have a material adverse effect on the Company's financial position, results of
operations or liquidity.
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, 1997 $13 1/2 $12 1/2 $0.28
June 30, 1997 14 12 3/8 0.28
September 30, 1997 13 7/8 12 13/16 0.28
December 31, 1997 14 3/4 12 11/16 0.28
March 31, 1998 $15 5/16 $13 1/2 $0.28
June 30, 1998 15 1/16 12 5/8 0.28
September 30, 1998 14 10 7/8 0.28
December 31, 1998 13 11 1/16 0.28
Through
February 28, 1999 $12 7/16 $10 13/16 $0.28(1)
</TABLE>
(1) Paid March 15, 1999
Approximate number of equity security holders:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- -------------------------
(as of December 31, 1998)
<S> <C>
Shares of Beneficial Interest, without par value 1,974
</TABLE>
The Company estimates that there were over 18,000 beneficial owners of shares,
including owners whose shares were held in brokerage and trust accounts.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share and share data)
OPERATING DATA:
Revenues (1)..................................... $ 53,354 $ 47,551 $ 47,789 $ 46,290 $ 43,308
Income before gains on sales of real
estate investments and extraordinary item..... 11,141 9,602 11,116 10,257 9,911
Net income ...................................... 13,616 12,880 12,231 10,304 15,266
Funds from operations (2)........................ 23,435 22,392 22,274 21,017 20,084
Cash flows from operating activities............. 23,266 23,145 21,956 20,203 20,212
Cash dividends paid ............................. 19,300 19,207 19,102 18,882 18,683
BASIC AND DILUTED EARNINGS PER SHARE DATA:
Income before gains on sales of real estate
investments and extraordinary item - Basic.... $ 0.65 $ 0.56 $ 0.65 $ 0.61 $ 0.59
Net income - Basic............................... 0.79 0.75 0.72 0.61 0.92
Income before gains on sales of real estate
investments and extraordinary item - Diluted.. 0.64 0.56 0.65 0.61 0.59
Net income - Diluted............................. 0.78 0.75 0.72 0.61 0.92
Cash dividends paid.............................. 1.12 1.12 1.12 1.12 1.12
Weighted average number
of shares outstanding -Basic................... 17,206,868 17,144,674 17,055,496 16,861,324 16,682,675
Weighted average number
of shares outstanding -Diluted................. 17,487,443 17,158,292 17,068,701 16,861,324 16,690,498
BALANCE SHEET DATA:
Real estate investments (3)....................... 500,485 $ 399,144 $ 400,711 $ 395,800 $ 389,094
Total assets...................................... 426,891 337,521 339,629 344,571 347,172
Fixed-rate debt................................... 134,803 124,766 111,207 114,609 116,961
Bank line......................................... 85,700 19,100 32,250 29,250 23,645
Shareholders' equity.............................. 179,624 186,249 191,948 196,799 202,684
</TABLE>
(1) Revenues comprise minimum rents, percentage rents, recoveries from
tenants, interest income and other income.
(2) The Company considers Funds From Operations (FFO) to be an alternate
measure of an equity REIT's performance since FFO 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 25.
(3) Real estate investments reflect acquisition costs and capitalized costs
of improvements before deduction of depreciation and amortization,
investment in unconsolidated real estate subsidiary and mortgage notes
receivable.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of the consolidated financial condition
and results of operations of Western Investment Real Estate Trust and its
affiliates (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 or commercial 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 $23,268,000, $23,277,000, and
$21,956,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Operating cash flows exceeded dividends paid of $19,300,000, $19,207,000 and
$19,102,000, for 1998, 1997 and 1996, respectively.
Net cash used in investing activities was $68,737,000 for the year ended
December 31, 1998. Included in this net amount are funds invested in (i) the
acquisition of three shopping centers ($35,843,000), (ii) Kienow's Food
Stores, Inc., a Portland-based grocery store operator that owns a portfolio
of real estate ($26,438,000), (iii) two mortgage notes ($14,869,000), and
(iv) improvements to real estate ($3,728,000). These investments were funded
substantially from net draws on the Company's unsecured bank line of credit
(the Bank Line) and $11,729,000 in proceeds from the 1997 and 1998 sales of
properties.
Net cash provided by financing activities was $45,518,000 for the year ended
December 31, 1998. The principal source of financing came from advances on the
Company's Bank Line.
25
<PAGE>
On April 28, 1998, the Company increased its unsecured Bank Line from $55
million to $75 million. On October 19, 1998, the Company increased its Bank Line
to $100 million and negotiated a reduction in the interest rate from the London
Interbank Offered Rate (LIBOR) plus 1.22% to an initial rate of LIBOR plus
1.15%. This commitment extends to September 30, 2001. The purpose of the Bank
Line is to provide working capital to facilitate the funding of operating cash
needs of the Company, including property acquisitions and development. At
December 31, 1998, the balance outstanding on the Bank Line was $85,700,000. The
Company intends to renew or replace this facility when it expires.
As of December 31, 1998, the Company's aggregate outstanding indebtedness of
$220,503,000 consisted of $124,794,000 in fixed-rate, long-term unsecured Senior
Notes, $85,700,000 of borrowings under the Company's variable-rate Bank Line and
$10,009,000 under a mortgage note assumed in the acquisition of the Windsor
property. Incurrence of debt by the Company, in excess of the Bank Line of
$100,000,000 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,
1998 was 44%. The Company's interest coverage ratio for the year ended December
31, 1998 was 2.8 times.
As of December 31, 1998, only one of the Company's properties was security for a
mortgage. 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.
At December 31, 1998, the Company owned nine properties that were held for sale.
These properties total 355,000 leasable square feet and have a net aggregate
carrying value of $22,836,000.
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.
The National Association of Real Estate Investment Trusts (NAREIT) defines FFO
as net income
26
<PAGE>
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 and unusual 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 NAREIT guidelines for the years ended December 31,
1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income......................................................... $13,616 $12,880 $12,231
Less: Gains on sales of real estate investments................. (2,475) (4,898) (1,115)
Plus: Real property depreciation................................ 10,763 9,799 9,886
Amortization of tenant improvement costs.................. 1,152 826 836
Amortization of leasing commission costs.................. 379 323 436
Loss on early extinguishment of debt...................... --- 1,620 ---
Management restructuring charge .......................... --- 1,842 ---
----------------------------------------------------
Funds From Operations.............................................. $23,435 $22,392 $22,274
====================================================
</TABLE>
The dividend payout ratio for the years ended December 31, 1998, 1997 and 1996
(calculated as dividend distributions made by the Company for the applicable
period divided by FFO), was 82%, 86% and 86%, respectively.
FFO increased $1,043,000 to $23,435,000 in 1998 from $22,392,000 in 1997. The
1998 increase of 5% is primarily the result of increased revenues partially
offset by increased interest and other operating expenses. FFO increased
$118,000 to $22,392,000 in 1997 from $22,274,000 in 1996.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income increased $736,000 to $13,616,000, or $0.78 per share (calculated
using diluted weighted average shares outstanding), in 1998, from $12,880,000,
or $0.75 per share (calculated using diluted weighted average shares
outstanding), in 1997. This 6% increase in net income is principally due to (i)
increased revenues, (ii) the absence, in 1998, of the management restructuring
charge and loss on early extinguishment of debt incurred in 1997, partially
offset by, (iii) the reduction in gains on sales of properties of $2,423,000
between the years and increased interest and other operating expenses.
During 1998, the Company entered into agreements to acquire or control the
operations of several shopping centers. These transactions are the primary
contributing factors for increased revenues, increased interest expense and
property related expenses:
27
<PAGE>
- On January 21, 1998, the Company acquired a 214,770 square foot
shopping center located in Modesto, California, for $17.5 million.
- On February 9, 1998, the Company acquired a 126,500 square foot
shopping center located in Windsor, California, for $20.9 million.
- On May 29, 1998, the Company entered into agreements to redevelop
and finance, by initially funding a $22.2 million participating
mortgage, a shopping center located in Walnut Creek, California. A
separate agreement also grants the Company a right of first offer
to purchase the property. The participating mortgage, secured by
the property, is expected to earn a fixed interest rate of 9.0%
plus 25% of the property's cash flow, as defined.
- On September 9, 1998, the Company entered into a master leasehold
interest in a 154,000 square foot shopping center located in
Dublin, California, that provides an option to purchase the
property at a fixed price during the first quarter of 2001. Under
the master lease, Western has full control of all leasing,
management and capital-expenditure decisions for the property. As
part of the transaction, Western funded an $8.2 million, 8.5%
fixed-rate first trust-deed loan secured by the property.
- On September 25, 1998, through a joint venture arrangement, the
Company acquired a 127,600 square foot shopping center located in
Blaine, Washington for $7.6 million.
- On October 30, 1998, the Company completed the acquisition of
Kienow's Food Stores, Inc., a Portland, Oregon-based corporation
(See Note 5 to the consolidated financial statements).
The Company continually assesses its portfolio for possible dispositions of
properties that no longer fit its investment criteria due to limited prospects
for growth in income, property type or for other reasons. Two single-tenant
retail properties, one industrial property and a parcel of undeveloped land were
sold in 1998. The sale of these properties resulted in partial offsets to
increases in revenues, interest and property-related expenses:
- On June 23, 1998, the Company sold a 58,704 square foot parcel of
undeveloped land located in North Reno, Nevada, for $292,000, at a
loss of $ 30,000.
- On November 19, 1998, the Company sold a 20,300 square foot
industrial property located in Commerce City, Colorado, for
$1,100,000, at a loss of $19,000.
- On December 23, 1998, the Company sold a 41,013, square foot
freestanding grocery store located in Newman, California, for
$3,536,000, at a gain of $445,000.
- On December 29, 1998, the Company sold a 34,400, square foot
freestanding grocery store located in El Cerrito, California, for
$2,752,000, at a gain of $2,079,000.
28
<PAGE>
The average occupancy for all property types (exclusive of the Kienow's
portfolio-see Note 5) at December 31, 1998 was 93.8% as compared with the
December 31, 1997 percentage of 92.2%.
Other income increased $276,000 to $981,000 in 1998 from $705,000 in 1997,
mainly due to fees earned on the Walnut Creek development.
The following table provides information on interest costs for the years ended
December 31, 1998, 1997 and 1996 (in thousands, except percentages):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest incurred....................................... $13,689 $11,523 $11,417
Interest capitalized.................................... 275 12 128
------------------------------------------------
Interest expense........................................ $13,414 $11,511 $11,289
------------------------------------------------
------------------------------------------------
Interest paid........................................... $12,562 $9,714 $11,217
================================================
Weighted average interest rate on Bank Line............. 6.83% 7.27% 7.33%
</TABLE>
Other operating expense increased $1,401,000 during 1998 to $4,412,000 from
$3,011,000 in 1997. This increase is due primarily to (i) increased compensation
costs for increased staffing associated with the Company's enhanced acquisition,
development and property operations capabilities and (ii) the master lease
payment on the Dublin shopping center (see above).
General and administrative expense increased $992,000 during 1998 to $2,733,000
from $1,741,000 in 1997. This increase is primarily due to increased
compensation costs.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income increased $649,000 to $12,880,000, or $0.75 per share (calculated
using diluted weighted average shares outstanding), in 1997, from $12,231,000,
or $0.72 per share (calculated using diluted weighted average shares
outstanding), in 1996. This 5% increase in net income is principally due to 1997
gains on sales of properties of $4,898,000 versus gains on sale of $1,115,000 in
1996, partially offset by a $1,842,000 management restructuring charge and a
$1,620,000 extraordinary loss resulting from the early extinguishment of debt.
Minimum rents decreased $528,000 to $37,845,000 in 1997 from $38,373,000 in
1996. This decrease primarily reflects the vacancy of the Petaluma property as
well as five property dispositions. 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. The average
occupancy for all property types at December 31, 1997 was 92.2% as compared to
the December 31, 1996 percentage of 93.7%.
Interest income increased $336,000 to $361,000 in 1997 from $25,000 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.
29
<PAGE>
Interest expense increased $222,000 to $11,511,000 in 1997 from $11,289,000
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.
Other operating expenses decreased $470,000 to $3,011,000 in 1997 from
$3,481,000 in 1996. The most significant factor in this 14% decrease is a
reduction in leasing and property management expenses.
As part of the 1997 management restructuring, participants in the Trustee
Emeritus and Death and Disability Programs have terminated their participation
in these programs. The most 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.
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/or 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.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
At December 31, 1998, the Company had total debt outstanding with a carrying
value of $220,503,000, including $85,700,000 outstanding under its Bank Line.
The Bank Line represents approximately 37% of the Company's total liabilities
and approximately 17% of the Company's historical cost of real estate owned.
At the present time, borrowings under the Company's Bank Line bear interest at
a floating rate. The Company recognizes that its results from operations may be
impacted negatively by future increases in interest rates.
While the Company has historically been successful in renewing and reletting
space, the Company is subject to the risk that certain leases expiring in 1999
and beyond may not be renewed or the terms of renewal may be less favorable to
the Company than current lease terms. The Company expects to incur costs in
making improvements or repairs to its portfolio of properties required by new or
renewing tenants and expects to incur costs associated with brokerage
commissions payable in connection with the reletting of space.
Many other factors affect the Company's actual financial performance and may
cause the Company's future results to be markedly outside of the Company's
current expectations.
30
<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, 1998, a significant portion of the Company's
Local Area Network and Wide Area Network are Year 2000 compliant.
During 1998, the Company undertook the conversion and upgrade of its management
information system. The Company expects to spend approximately $600,000 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.
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 make distributions in excess of 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: $14,619,000 in 1998; $14,327,000 in
1997; and $16,187,000 in 1996. 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.
31
<PAGE>
The table below summarizes the taxability of distributions and dividends paid
during the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
- ----------------------------------------- ------------------ ----------------- ---------------
<S> <C> <C> <C>
Ordinary income................... 78.1% 67.5% 80.2%
Return of capital................. 20.3% 23.2% 12.6%
Capital gains..................... 1.6% 9.3% 7.2%
----------------- ----------------- -----------------
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to General Instruction 1 to Item 305 of Regulation S-K, the Company is
exposed to interest rate changes primarily as a result of its Bank Line and
long-term debt used to maintain liquidity and fund capital expenditures and
expansion of the Company's real estate investment portfolio and operations. The
Company's interest rate risk-management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. The Company's objective with regards to long-term debt is to
borrow primarily at fixed rates.
The Company's interest rate risk is monitored using a variety of techniques. The
following table presents the principal amounts, weighted average interest rates,
fair values and other terms required by year of expected maturity to evaluate
the expected cash flows and sensitivity to interest rate changes (in thousands
except for percentages):
<TABLE>
<CAPTION>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
-------------------------- --------- -------- ---------- ------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate bank line -- -- $85,700 -- -- -- $85,700 $85,700
Average interest rate 6.83%
Fixed rate senior notes -- -- -- -- -- $124,794 $124,794 $114,130
Average interest rate 7.47%
Fixed rate mortgage note $201 $217 $234 $252 $272 $8,833 $10,009 $10,009
Average interest rate 7.61% 7.61% 7.61% 7.61% 7.61% 7.61%
</TABLE>
32
<PAGE>
As the table incorporates only those exposures that exist as of December 31,
1998, it does not consider those exposures or positions which could arise after
that date. Moreover, because firm commitments are not presented in the table
above, the information presented therein has limited predictive value. As a
result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during the period, the
Company's hedging strategies at that time and interest rates.
This discussion of the Company's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward - looking
statements.
33
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
Consolidated Financial Statements
and
Financial Statement Schedule
Form 10-K Item 8
December 31, 1998
34
<PAGE>
<TABLE>
<CAPTION>
WESTERN INVESTMENT REAL ESTATE TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
<S> <C>
Independent Auditors' Report 36
Consolidated Balance Sheets - December 31, 1998 and 1997 37
Consolidated Statements of Income - For the Years Ended
December 31, 1998, 1997 and 1996 38
Consolidated Statements of Shareholders' Equity - For the Years Ended
December 31, 1998, 1997 and 1996 39
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998, 1997 and 1996 40
Notes to Consolidated Financial Statements 41-57
Financial Statement Schedule III: Real Estate and
Accumulated Depreciation 58-59
</TABLE>
35
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders
Western Investment Real Estate Trust:
We have audited the consolidated financial statements of Western Investment Real
Estate Trust (a California real estate investment trust) and subsidiaries as
listed in the accompanying index. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement
schedule listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Investment
Real Estate Trust and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
San Francisco, California
February 3, 1999, except
For Note 17, which is as of
March 1, 1999
36
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------------------------------------------
December 31,
ASSETS 1998 1997
---------------------- --------------------------
(In thousands except share data)
<S> <C> <C>
Real estate investments:
Real estate properties....................................................... $410,183 $392,470
Less accumulated depreciation and amortization............................... (82,660) (77,642)
----------- -----------
327,523 314,828
Real estate properties held for sale......................................... 30,288 5,382
Less accumulated depreciation and amortization............................... (7,452) (1,861)
------------ ------------
22,836 3,521
Unconsolidated real estate subsidiary (Note 5)............................... 43,854 ---
Mortgage notes receivable.................................................... 16,160 1,292
---------- ----------------
Net real estate investments............................................... 410,373 319,641
Cash and cash equivalents....................................................... 1,512 1,463
Accounts receivable, acquisition deposits, and other assets..................... 13,704 15,279
Deferred debt issuance costs, net............................................... 1,302 1,138
----------- -----------
$426,891 $337,521
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank line (Note 8).............................................................. $ 85,700 $ 19,100
Senior notes, net (Note 8)...................................................... 124,794 124,766
Mortgage payable................................................................ 10,009 ---
--------- --------------
220,503 143,866
Interest payable................................................................ 3,670 2,917
Prepaid rents and security deposits............................................. 2,161 1,428
Other liabilities............................................................... 3,517 3,061
---------- -----------
Total liabilities............................................................ 229,851 151,272
-------- ---------
Minority interests (Note 5)..................................................... 17,416 ---
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized;
Shares issued or outstanding.............................................. --- ---
Shares of beneficial interest, no par value,
Unlimited share authorization.
Issued and outstanding: December 31, 1998 - 17,216,550 shares.............
December 31, 1997 - 17,191,860 shares............. 241,741 242,682
Accumulated dividends in excess of net income................................ (62,117) (56,433)
-------- -----------
Commitments and contingencies (Notes 4, 8 and 16)
Total shareholders' equity...................................................... 179,624 186,249
------- ---------
$426,891 $337,521
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------ ---------------- ----------------
(In thousands, except per share and share data)
<S> <C> <C> <C>
REVENUES:
Minimum rents....................................................... $42,350 $37,845 $38,373
Percentage rents.................................................... 539 552 649
Recoveries from tenants............................................. 8,551 8,088 8,138
Interest income..................................................... 933 361 25
Other income........................................................ 981 705 604
------- ------- -------
Total revenues......................................................... 53,354 47,551 47,789
------- ------- -------
EXPENSES:
Interest............................................................ 13,414 11,511 11,289
Property operating costs............................................ 9,253 8,798 8,933
Depreciation and amortization....................................... 12,401 11,046 11,264
Other operating expenses............................................ 4,412 3,011 3,481
General and administrative.......................................... 2,733 1,741 1,706
Management restructuring charge..................................... --- 1,842 ---
------- ------- -------
Total expenses......................................................... 42,213 37,949 36,673
------- ------- -------
Income before gains on sales of real estate
investments and extraordinary item............................... 11,141 9,602 11,116
Gains on sales of real estate investments........................... 2,475 4,898 1,115
------- ------- -------
Income before extraordinary item.................................... 13,616 14,500 12,231
Extraordinary item - loss on early extinguishment of debt........... --- (1,620) ---
------- ------- -------
Net income.......................................................... $13,616 $12,880 $12,231
======= ======= =======
Basic earnings per share data:
Income before gains on sales of real estate
investments and extraordinary item............................... $ 0.65 $ 0.56 $ 0.65
====== ======= =======
Gains on sales of real estate investments........................... $ 0.14 $ 0.28 $ 0.07
====== ======= =======
Income before extraordinary item.................................... $ 0.79 $ 0.84 $ 0.72
====== ======= =======
Extraordinary item - loss on early extinguishment of debt........... $ --- $(0.09) $ ---
===== ======= ========
Net income.......................................................... $ 0.79 $ 0.75 $ 0.72
====== ======= =======
Diluted earnings per share data:
Income before gains on sales of real estate
investments and extraordinary item............................... $0.64 $0.56 $0.65
===== ===== =====
Gains on sales of real estate investments........................... $0.14 $0.28 $0.07
===== ===== =====
Income before extraordinary item.................................... $0.78 $0.84 $0.72
===== ===== =====
Extraordinary item - loss on early extinguishment of debt........... $ --- $ (0.09) $ ---
===== ======== =====
Net income.......................................................... $0.78 $0.75 $0.72
===== ===== =====
Cash dividends paid.................................................... $1.12 $ 1.12 $ 1.12
===== ======= =======
Weighted average number of shares outstanding-Basic.................... 17,206,868 17,144,674 17,055,496
========== ========== ==========
Weighted average number of shares outstanding-Diluted.................. 17,487,443 17,158,292 17,068,701
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998, 1997 and 1996
(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>
Balances, January 1, 1996 16,972,496 $240,034 $(43,235) $196,799
Debenture redemptions................................ 165,936 2,020 --- 2,020
Net income........................................... --- --- 12,231 12,231
Cash dividends paid.................................. --- --- (19,102) (19,102)
---------- ---------- ---------- ----------
Balances, 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)
---------- ---------- ---------- ----------
Balances, December 31, 1997 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 paid.................................. --- --- (19,300) (19,300)
---------- ---------- ---------- ----------
BALANCES DECEMBER 31, 1998 17,216,550 $241,741 $(62,117) $179,624
========== ======== ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS WESTERN INVESTMENT REAL ESTATE TRUST
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------
1998 1997 1996
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 13,616 $ 12,880 $ 12,231
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................................... 12,401 11,046 11,264
Amortization of deferred debt issuance costs........................... 373 369 365
Gains on sales of real estate investments.............................. (2,475) (4,898) (1,115)
Earned compensation on restricted stock plan........................... 176 --- ---
Loss on early extinguishment of debt................................... --- 1,620 ---
Increase in accounts receivable and other assets....................... (2,350) (418) (279)
Increase in accrued rent receivable.................................... (379) (471) (797)
Increase (decrease) in interest payable................................ 753 1,440 (164)
Increase in prepaid rents,
security deposits and other liabilities............................. 1,153 1,709 451
--------- --------- ----------
Net cash provided by operating activities.............................. 23,268 23,277 21,956
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of real estate investments............................ 7,237 10,135 1,371
Proceeds from sale of marketable securities............................... 48 --- 234
Investment in mortgage note receivable.................................... (14,869) (1,300) ---
(Acquisitions) recovery of acquisition costs of real estate investments... (35,843) (283) 36
Investment in unconsolidated real estate subsidiary....................... (26,438) --- ---
Funds released from escrow................................................ 7,117 --- ---
Funds escrowed pending acquisition........................................ (2,625) (7,117) ---
Improvements of real estate investments:
Build-to-suit developments............................................. (335) (1,561) (4,239)
New leases............................................................. (2,725) (3,264) (1,707)
General................................................................ (668) (666) (192)
Recovery of investment in direct financing leases......................... 364 316 272
----------- --------- ----------
Net cash used in investing activities.................................. (68,737) (3,740) (4,225)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank line..................................................... 107,350 50,050 40,468
Principal payments on bank line........................................... (40,750) (63,200) (37,468)
Principal payments on real estate loan payable............................ (156) --- (1,294)
Loans to officers......................................................... (1,299) --- ---
Redemption of convertible debentures...................................... --- (61,310) (40)
Net proceeds from issuance of shares...................................... 182 628 ---
Net proceeds from senior notes offering................................... --- 74,851 ---
Deferred long-term debt issuance costs.................................... (509) (838) ---
Cash dividends paid....................................................... (19,300) (19,207) (19,102)
---------- --------- ----------
Net cash provided by (used in) financing activities.................... 45,518 (19,026) (17,436)
---------- --------- ----------
Net increase in cash and cash equivalents................................. 49 511 295
Cash and cash equivalents, at beginning of period....................... 1,463 952 657
---------- --------- ----------
Cash and cash equivalents, at end of period............................. $ 1,512 $ 1,463 $ 952
========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................................... $ 12,562 $ 9,714 $ 11,217
========= ========= ========
NON CASH FINANCING ACTIVITY:
Real estate acquisition debt.............................................. $ 10,164 $ --- $ ---
========= ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: ORGANIZATION AND BASIS OF PRESENTATION
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. At December 31, 1998, Western and its affiliates
had investments in 66 properties, primarily anchored by supermarkets and drug
stores, containing approximately 5.7 million square feet of gross leasable area.
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 as of December 31, 1998 (collectively, the
Company). Western is the sole general partner in Western/Kienow's L.P. and owned
a 60% interest as of December 31, 1998.
The Western and its affiliates use the equity method of accounting to account
for investments that do not qualify for consolidation.
All significant intercompany accounts and transactions have been eliminated.
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE INVESTMENTS
Properties composing 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 properties on a straight-line
basis. The estimated useful lives for properties range from 23 to 40 years for
buildings and two to 31 years for improvements.
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 decides to dispose of a
property, the Company will assess the recoverability of the net recorded value
of the property and 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, 1998, 1997 or 1996.
41
<PAGE>
Included in real estate investments are net investments in two direct financing
leases. These investments are carried at 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 a 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 terms of the associated leases. The following
table provides a reconciliation of leasing commissions and leasing-related
costs:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year...................... $1,630 $1,587 $1,673
Additions..................................... 761 366 350
Dispositions.................................. (37) --- ---
Amortization.................................. (379) (323) (436)
--------------------------------------------------------------
Balance at end of year............................ $1,975 $1,630 $1,587
===================================================================
</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 store sales. Such percentage-based rental
income was recognized during 1996, 1997 and the first two quarters of 1998,
based on estimates. Commencing on July 1, 1998, for the last two quarters of
1998, the Company recognized percentage-based rental income in accordance with
EITF 98-9 issued in May 1998. EITF 98-9 permits revenue recognition of
percentage-based rental income only when tenants sales exceed the level at which
percentage-based rents are owed. In November 1998, the EITF amended 98-9,
permitting use of the requirements thereof or the method used prior to its
issuance. The Securities and Exchange Commission ("SEC") has this issue under
review and may require companies to account for percentage-based rental income
as originally required by EITF 98-9. Western's recognition of percentage-based
rental income is in accordance with such original requirements. The effect of
this change on the Company's financial results for the last two quarters of 1998
was to reduce percentage rents by approximately $300,000.
The Company recognizes rental income and related accrued rental receivable in
accordance with FASB No. 13, "ACCOUNTING FOR LEASES." Accrued rent receivable
(straight-line rental revenues in excess of contractually required payments)
included in income was $379,000 in 1998, $471,000 in 1997 and $797,000 in 1996.
CASH EQUIVALENTS
Cash equivalents comprise certain highly liquid investments with original
maturities of less than three months.
42
<PAGE>
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs incurred in connection with the issuance of debt
are amortized over the term of the associated debt arrangements using a method
that approximates the interest method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
RECLASSIFICATION
Certain prior-year financial statement amounts and related footnote information
for 1997 and 1996 have been reclassified to conform with the 1998 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Financial Accounting Statement No. 133 (FASB 133),
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." The Company will
adopt FASB 133 for interim periods beginning in 2000, the effective date of FASB
133. Management believes that the adoption of this Statement will not have a
material impact on the Company's financial statements.
43
<PAGE>
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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE PROPERTIES:
Balance at beginning of year........................................ $392,470 $384,550 $395,800
Increases: Acquisitions ........................................ 46,064 288 ---
Improvements......................................... 2,967 4,878 5,788
Properties reclassified from held for sale........... --- 3,070 ---
Decreases: Properties reclassified as held for sale............. (30,593) --- (16,161)
Dispositions......................................... (304) --- (569)
Recovery of acquisition costs........................ (57) --- (36)
Amortization of direct financing leases.............. (364) (316) (272)
-------- -------- --------
Balance at end of year.............................................. $410,183 $392,470 $384,550
======== ======== ========
ACCUMULATED DEPRECIATION AND AMORTIZATION:
Balance at beginning of year........................................ $ 77,642 $ 66,271 $ 61,249
Increases: Additions charged to operations...................... 11,915 10,625 10,722
Accumulated depreciation of properties
reclassified from held for sale................... --- 746 ---
Decreases: Dispositions......................................... --- --- (175)
Accumulated depreciation of properties
held for sale..................................... (6,897) --- (5,525)
-------- -------- --------
Balance at end of year.............................................. $ 82,660 $ 77,642 $ 66,271
========= ========= =========
REAL ESTATE PROPERTIES HELD FOR SALE:
Balance at beginning of year........................................ $ 5,382 $ 16,161 $ ---
Increases: Improvements......................................... --- 29 ---
Properties reclassified as held for sale............. 30,593 -- 16,161
Decreases: Properties no longer held for sale................... --- (3,070) ---
Dispositions......................................... (5,687) (7,738) ---
-------- -------- --------
Balance at end of year.............................................. $ 30,288 $ 5,382 $ 16,161
======== ========== =========
ACCUMULATED DEPRECIATION AND AMORTIZATION:
Balance at beginning of year........................................ $ 1,861 $ 5,525 $ ---
Increases: Accumulated depreciation of properties
reclassified as held for sale..................... 6,897 --- 5,525
Decreases: Accumulated depreciation of properties
removed from market............................... --- (746) ---
Dispositions......................................... (1,306) (2,918) ---
---------- ----------- --------------
Balance at end of year.............................................. $ 7,452 $ 1,861 $ 5,525
========= ========== ==========
</TABLE>
At December 31, 1998, the Company owned nine properties that were held for sale.
These properties total 355,000 leasable square feet and have a net aggregate
carrying value of $22,836,000. The Company has determined that these properties
do not meet the Company's long-term strategic objectives, has developed
disposition plans, and is marketing the properties for sale. Estimated fair
values for these properties are in excess of recorded carrying values. The
Company ceases depreciation on assets classified as held for sale. The net
operating income from these properties included in 1998 operations was
$3,008,000. It is anticipated that these properties will be sold in 1999.
44
<PAGE>
As of December 31, 1998, only one of the Company's properties was security for a
mortgage. 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 (except for the Windsor, California, property where
the secured lender requires earthquake insurance), 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
for its properties. 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.
Note 4: CAPITAL EXPENDITURES
It is the Company's practice to capitalize costs that exceed $4,000 and are
associated with the improvement and rental of real estate investments.
Capitalized costs include leasing-related costs and property improvements.
Capital expenditures for the twelve months ended December 31, 1998, and 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
----------------------------------------------------
1998 1997
- --------------------------------------------------------------------- -------------------------- -------------------------
<S> <C> <C>
"Build to Suit" capital improvements........................... $335 $1,561
Capitalized costs incurred in connection with leasing previously
UNLEASED space............................................. 78 142
Capitalized costs incurred in connection with leasing previously
LEASED space............................................... 2,647 3,122
Capitalized costs that relate to improvements to common
areas...................................................... 668 666
------ ------
Total capitalized expenditures................................. $3,728 $5,491
====== ======
Improvements................................................... $2,967 $4,907
Leasing-related costs.......................................... 761 584
------ ------
Total capitalized expenditures................................. $3,728 $5,491
====== ======
</TABLE>
45
<PAGE>
During the year ended December 31, 1998, 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 1998 and are reflected in
the preceding table. In addition, a portion remains an obligation of the Company
at December 31, 1998 (See Note 16).
The aggregate and per square foot information for 1998 is as follows (in
thousands, except for per square foot data):
<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> <C>
Shopping centers retail
properties --- --- $1,860 $7.50 $551 $2.22
Commercial --- --- 681 $18.27 205 $5.50
Industrial --- --- --- --- --- ---
</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 and
retail properties $98 $0.40 $204 $0.82
Commercial --- --- --- ---
Industrial --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5: 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, in a transaction valued at approximately $55
million. Following an agreed-upon $11,000,000 stock redemption from Kienow's
cash on hand, the purchase price was paid $26,240,000 in cash and by issuance of
1,432,364 units in a newly formed DownREIT limited partnership valued at
$17,416,000. The limited partnership units are exchangeable into shares of the
Company on a one-for-one basis after certain conditions have been met. The
acquisition has been accounted for by the purchase method. The Company
consolidates the DownREIT limited partnership, which accounts for its investment
in the newly formed parent company of Kienow's, on the equity basis of
accounting. The interests of the limited partners in the DownREIT limited
partnership are presented as minority interests in the accompanying consolidated
financial statements.
46
<PAGE>
The 545,495 square foot real estate portfolio of Kienow's comprises six shopping
centers, four freestanding stores and seven non-core properties. The Company
intends to retain and redevelop 10 core retail properties (six shopping centers
and four freestanding stores), encompassing 449,217 square feet, located in the
greater Portland area. After completing the disposition of the seven non-core
properties and renovating the 10 core properties, it is anticipated that the net
real estate value at cost will be approximately $43,000,000.
The Company intends to discontinue the wholesale and retail grocery operations,
retenant the anchor-store space of the 10 core properties and dispose of
non-core properties. The purchase price was allocated to the core properties
after valuing the properties to be disposed of at estimates of net realizable
value. There was no excess of purchase price over the value of the assets
acquired. As certain properties have and will be disposed of and as the
remaining Kienow's properties will be converted from operating wholesale and
retail grocery businesses to rental properties, historical revenues and net
income of Kienow's are not relevant to the past or present operating results of
the Company.
Since the close of escrow (October 30, 1998), the Company has been engaged in
the process of redeveloping and retenanting the core properties. During the
period from October 30, 1998 to December 31, 1998, the Company capitalized
$255,000 of interest expense and has reduced its investment by $139,000 of
incidental income generated by the Kienow's operations.
Summarized financial information for Kienow's as of December 31, 1998 is as
follows (in thousands):
<TABLE>
<S> <C>
Total assets $47,984
Total liabilities (4,196)
Net assets $43,788
</TABLE>
With respect to the planned disposition of the non-core properties, any gains or
losses on disposition will be accounted for as adjustments to the purchase price
of the core properties (See Note 17).
Note 6: LEASES
OPERATING LEASE-RECEIVABLE
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, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 43,800
2000 41,274
2001 36,841
2002 33,760
2003 29,820
Thereafter 218,723
--------
Total $404,218
========
</TABLE>
47
<PAGE>
DIRECT FINANCING LEASE - RECEIVABLE
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, 1998, range from $212,000 in 1999 to $142,000 in 2003.
At December 31, 1998, the Company's investment in direct financing leases was
$1,118,000, and was determined by adding the estimated residual value of
$383,000 to the total remaining minimum lease payments of $920,000, less
unearned income of $185,000. The original cost of the properties subject to
these direct financing leases was $4,449,000. Included in other income is income
recorded under direct financing leases of $105,000, $155,000 and $197,000 in
1998, 1997 and 1996, respectively.
OPERATING LEASE - PAYABLE
Future minimum lease payments scheduled to be paid that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 831
2000 853
2001 1,489
2002 1,529
2003 1,577
Thereafter 15,240
--------
Total $ 21,519
========
</TABLE>
Note 7: MAJOR TENANT
Total revenues attributable to the 23 anchor store properties dispersed
throughout Northern California and Nevada and leased to Raley's (including its
subsidiary, Nob Hill Foods), a grocery and drug retailer, and the Company's most
significant tenant, were $10,413,000, $9,178,000 and $9,382,000 in 1998, 1997
and 1996, respectively. These amounts represented 20%, 19% and 20% of total
revenues during 1998, 1997 and 1996, respectively.
Note 8: BANK LINE AND NOTES PAYABLE
BANK LINE OF CREDIT
At December 31, 1998, the Company had $85,700,000 outstanding under its
$100,000,000 unsecured bank line of credit (the Bank Line). Interest on funds
drawn under the Bank Line is LIBOR plus 1.15% and is payable at the maturity of
each LIBOR contract. At December 31, 1998, the weighted average interest rate
was 6.38%. In addition, the Company pays an annual fee of one quarter of one
percent (0.25%) of the total commitment. The Company is not required to pledge
any assets or maintain compensating balances for this Bank Line, 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 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
intends to renew or
48
<PAGE>
replace this facility before it expires on September 30, 2001.
In connection with the redevelopment of a property located in Walnut Creek,
California, the Company has obtained an irrevocable standby letter of credit
in the amount of $3,336,000 from one of the lenders with which the Company
has its Bank Line. The amount available under the Bank Line is reduced by the
amount of the letter of credit. This letter of credit expires April 30, 2006.
SENIOR NOTES
In February 1994, the Company sold $50,000,000 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 $75,000,000 of unsecured Senior Notes (the
1997 Notes) in a public offering, comprising $25,000,000 due 2006, $25,000,000
due 2008 and $25,000,000 due 2010. The 1997 Notes were issued under the
Company's $150,000,000 shelf registration.
All Senior Notes outstanding at December 31, 1998 are summarized in the
following table (in thousands except for interest rate and year data):
<TABLE>
<CAPTION>
Net Amount Coupon Interest Rate Due Date Years to Maturity
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
$49,925 7.875% February 15, 2004 5
24,970 7.100% September 15, 2006 8
24,948 7.200% September 15, 2008 10
24,951 7.300% September 15, 2010 12
-------- ====== ==
Total/Weighted
Average $124,794 7.470% 8
======== ====== ==
</TABLE>
As of December 31, 1998, the Senior Notes carried "investment grade" ratings
from Moody's Investor Service (Baa3) and Standard & Poor's (BBB-).
Note 9: LOANS TO RELATED PARTIES
The Board of Trustees approved loans totaling $1.3 million to the Company's
Chief Executive Officer; Chief Financial Officer; Senior Vice President,
Investments; and Senior Vice President, Operations. The loan proceeds were used
to fund the purchase of Company shares of beneficial ownership by these
individuals in order to increase their ownership in the Company and to more
closely align their interests with those of shareholders. The loans bear
interest at a rate of 5.58%, are recourse and are secured by a pledge of certain
shares of beneficial ownership of the Company.
The Board of Trustees also approved loans to the Company's Chief Executive
Officer and Chief Financial Officer to fund their acquisition of the common
stock of Western Real Estate Services, Inc. (WRESI), in which the Company has
a 97% economic interest. WRESI was formed to facilitate the acquisition of
Kienow's (see Note 5). The amount loaned to each individual was $283,750 with
interest at 7.5% and maturity dates of October 30, 2008.
49
<PAGE>
Note 10: 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,
cash equivalents and interest payable as of December 31, 1998 and 1997, due to
the short-term nature of these instruments.
The Company further believes that the carrying amounts of the Bank Line and
mortgage payable approximate fair value as of December 31, 1998 and 1997 because
interest rates and yields for these instruments are consistent with yields
currently available to the Company. The fair value of the Company's 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 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................ $ 1,512 $ 1,512 $ 1,463 $ 1,463
Bank line ........................................... $ 85,700 $ 85,700 $ 19,100 $ 19,100
Senior notes ........................................ 124,794 114,130 124,766 125,848
Mortgage payable..................................... 10,009 10,009 --- ---
Interest payable..................................... 3,670 3,670 2,917 2,917
</TABLE>
Note 11: 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.
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.
50
<PAGE>
The revenues, profit (loss), assets and real estate investment capital
expenditures for each of the reportable segments are summarized as follows for
the years ended and as of December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Shopping centers $46,746 $41,121 $40,761
Single-tenant retail 2,428 2,722 3,045
Other commercial 4,072 3,360 3,863
Non-segment 108 348 120
------- ------- -------
Total revenue $53,354 $47,551 $47,789
======= ======= =======
PROFIT (LOSS) Funds from operations:
Shopping centers $37,119 $32,310 $31,697
Single-tenant retail 2,292 2,591 2,908
Other commercial 3,795 3,035 3,525
------- ------- -------
Total segment contribution to FFO 43,206 37,936 38,130
Interest income 93 359 24
Other income 15 (11) 96
Interest expense (13,414) (11,511) (11,289)
Other operating expenses (3,624) (2,542) (2,875)
Personal property depreciation (108) (98) (106)
General and administrative (2,733) (1,741) (1,706)
------- ------- -------
Consolidated FFO 23,435 22,392 22,274
Depreciation and amortization (12,294) (10,948) (11,158)
Gains on sales of real estate investments 2,475 4,898 1,115
Loss on early extinguishment of debt --- (1,620) ---
Management restructuring charges --- (1,842) ---
------- ------- -------
Net income $13,616 $12,880 $12,231
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Shopping centers $364,879 $285,521
Single-tenant retail 20,352 10,925
Other commercial 25,627 21,903
Non-segment 16,033 19,172
-------- --------
Total assets $426,891 $337,521
======== ========
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT CAPITAL EXPENDITURES
Acquisitions
Shopping centers $35,843 $ 283 $ ---
Single-tenant retail --- --- ---
Other commercial --- --- ---
------- ----- ------
Total acquisitions $35,843 $ 283 $ ---
======= ===== ======
Developments
Shopping centers $ 2,691 $5,442 $5,923
Single-tenant retail --- --- ---
Other commercial 1,036 49 215
------- ----- ------
Total developments $ 3,727 $5,491 $6,138
======== ====== ======
</TABLE>
Note 12: STOCK OPTION PLAN
1988 STOCK OPTION PLAN
In May 1988, the Company adopted a non-qualified stock option plan (the "1988
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. In 1998, as part of
adopting a new Equity Incentive Plan, the 1988 Plan was terminated;
consequently, no further options will be granted under the 1988 Plan.
Activity in the Company's 1988 share option plan during the three years ended
December 31, 1998, is summarized in the following table:
<TABLE>
<CAPTION>
Shares Available Options Weighted
for Future Granted and Average
Options Grants Outstanding Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
12/31/95 Balance 50,840 249,000 $12.57
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------
Exercised --- (1,400) $11.46
Expired 8,300 (8,300) $12.76
Plan Terminated (8,880) --- ---
- ----------------------------------------------------------------------------------------------------------------------
12/31/97 Balance --- 236,400 $13.03
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
The following table summarizes information about the Company's 1988 Plan
outstanding at December 31, 1998:
<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, 1998 Contractual life Price Options Price
- ----------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
$11.00-$13.88 236,400 2.3 years $13.03 191,240 $13.04
</TABLE>
1998 EQUITY INCENTIVE PLAN
In May 1998, the Company adopted the 1998 Equity Incentive Plan (the "1998
Plan"). This Plan permits the Company to grant incentive stock options,
restricted stock, unrestricted stock, stock appreciation rights and
non-qualified stock options. A total of 850,000 shares of beneficial interest
have been authorized under the 1998 Plan.
Activity in the Company's 1998 Equity Incentive Plan is summarized in the
following table:
<TABLE>
<CAPTION>
Shares
Available Non- Weighted
for Incentive Stock Qualified Average
Future Stock Restricted Unrestricted Appreciation Stock Exercise
Grants Options Stock Stock Rights Options Price
- ----------------------------- ------------- ------------- ------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/1997 Balance -0- -0- -0- -0- -0- -0- $ -0-
- ----------------------------- ------------- ------------- ------------ ------------- ------------- -------------- -------------
Plan Adopted 850,000 --- --- --- --- --- $ ---
Options Granted (532,000) 532,000 $13.92
Options Expired 1,500 (1,500) $13.00
Restricted Stock Granted (41,500) 41,500 $14.36
Restricted Stock Issued (12,237) $14.40
- ----------------------------- ------------- ------------- ------------ ------------- ------------- -------------- -------------
12/31/1998 BALANCE 278,000 530,500 29,263 -0- -0- -0- $13.95
- ----------------------------- ------------- ------------- ------------ ------------- ------------- -------------- -------------
</TABLE>
The following table summarizes information about the Company's 1998 Equity
Incentive Plan grants outstanding at December 31, 1998:
<TABLE>
<CAPTION>
GRANTS OUTSTANDING
---------------------------------
Number of Weighted Weighted
Grants Average Average
Range of Outstanding at Remaining Exercise
Exercise Prices December 31, 1998 Contractual life Price
----------------------- ------------------------ ----------------------- -------------------------
<S> <C> <C> <C>
$12.59-$14.78 559,763 5.0 years $13.95
</TABLE>
53
<PAGE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under FASB No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," the Company 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 1998, 1997 and 1996.
The pro-forma effects on net income and net income pershare 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 (in thousands, except for per
share data):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------------------------ -------------------------------- ----------------------------
AS ADJUSTED As Adjusted As Adjusted
REPORTED PRO-FORMA Reported Pro-Forma Reported Pro-Forma
------------ --------------- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income $13,616 $13,299 $12,880 $12,852 $12,231 $12,214
Per share net income-Basic $0.79 $0.78 $0.75 $0.75 $0.72 $0.72
</TABLE>
The weighted average fair value per option granted during the year ended
December 31, 1998, 1997 and 1996, estimated on the date of grant using an
option-pricing model that approximates the Black-Scholes method, was $1.48,
$1.58 and $1.69, 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 1998, 1997 and 1996, respectively: risk-free interest rate of
4.67%, 5.86% and 6.05%; forfeiture rate, 2.3%, 8.6% and 7.4%; share-volatility
rate, 20.9%, 21.1% and 21.9%; and dividend yield, 8.05%, 8.18% and 8.37%.
Note 13: DIVIDEND REINVESTMENT PLAN
In accordance with the Dividend Reinvestment and Share Purchase Plan adopted by
the Company in 1990, during 1998, the Company received $166,000 net of issuance
costs and issued 11,053 shares of beneficial interest. Additionally, $495,000 in
dividend reinvestment proceeds were used to purchase shares in the open market
for participating shareholders in 1998. During 1997 and 1996, dividend
reinvestment proceeds of $699,000 and $706,000, respectively, were used to
purchase shares in the open market for participating shareholders.
54
<PAGE>
Note 14: 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, 1998, 1997 and 1996 is shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding............................... 17,206,868 17,144,674 17,055,496
Plus: Options with exercise prices below year-end
market price of common stock ....................... 11,931 13,618 13,205
Stock issued under restricted stock plan................. 29,263 --- ---
OP units convertible into shares of beneficial interest.. 239,381 --- ---
----------------------------------------------------
Adjusted weighted average shares outstanding...................... 17,487,443 17,158,292 17,068,701
</TABLE>
55
<PAGE>
Additionally, during the years 1997 and 1996, 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 was $61,310,000 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 and
1996, and as such, conversion was not assumed in the above calculation.
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 year and, therefore, the effect would
be antidilutive:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ --------------------- --------------------
<S> <C> <C> <C>
Number of options 563,000 86,000 116,000
Range of exercise prices $13.31-$14.78 $13.81-$13.88 $13.31-$13.88
</TABLE>
Note 15: QUARTERLY RESULTS OF OPERATIONS
The following is a summary of quarterly financial information for the last two
years:
<TABLE>
<CAPTION>
Unaudited Quarters
-------------------------------------------------------------
(In thousands, except per share and share data) First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
TOTAL REVENUES................................................ $11,872 $13,333 $12,969 $15,180
======= ======= ======= =======
INCOME BEFORE GAINS ON SALES OF REAL
ESTATE INVESTMENTS AND EXTRAORDINARY ITEM.................. $2,391 $2,659 $2,737 $3,354
====== ====== ====== ======
NET INCOME.................................................... $2,391 $2,629 $2,737 $5,859
====== ====== ====== ======
BASIC EARNINGS PER SHARE...................................... $0.14 $0.15 $0.16 $0.34
DILUTED EARNINGS PER SHARE.................................... $0.14 $0.15 $0.16 $0.33
DIVIDENDS..................................................... $0.28 $0.28 $0.28 $0.28
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC....................... 17,194,402 17,204,313 17,210,772 17,214,244
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED..................... 17,266,092 17,269,357 17,249,265 18,195,271
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
</TABLE>
56
<PAGE>
Note 16: COMMITMENTS AND CONTINGENCIES
In connection with the redevelopment of a property located in Walnut Creek,
California, the Company was committed to fund $15,804,000 on a note secured by a
first deed of trust on the property under development.
As of December 31, 1998, the Company has entered into several new leases that
call for approximately $898,000 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 position, results of
operations or liquidity.
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 17: SUBSEQUENT EVENTS
During the period ended March 1, 1999, the Company sold four non-core properties
in Oregon that were acquired in 1998 as part of the Kienow's Food Stores, Inc.
portfolio. Western, as general partner of the DownREIT limited partnership,
plans on using the sales proceeds of $2.5 million from these four property
dispositions to purchase real estate pursuant to tax-deferred exchanges.
57
<PAGE>
Western Investment Real Estate Trust
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998
(In thousands except for dates of construction and acquisition
and depreciable lives)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------ ------------- ------------------------- -------------------------
Cost capitalized/(sold)
Initial cost to company Subsequent to acquisition
----------------------- -------------------------
Buildings and
Property Name Encumbrance Land Improvements Land Improvements
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shopping Center
- ---------------
Anderson Square, Anderson, CA $1,145 $2,125 $0 $376
Angel's Camp Town Center, Angels Camp, CA 580 4,447 0 148
Skypark Plaza Shopping Center, Chico, CA 2,854 10,454 0 2,260
Coalinga Shopping Center, Coalinga, CA 816 2,144 0 959
Serra Center, Colma, CA (30% interest)(1) 433 914 0 460
Mercantile Row Shopping Center, Dinuba, CA 1,440 6,208 0 64
Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,194 0 16
Northridge Shopping Center, Fair Oaks, CA 1,666 6,830 0 175
Commonwealth Square Shopping Center, Folsom, CA 3,312 13,022 0 845
Victorian Walk Shopping Center, Fresno, CA 1,120 7,356 0 222
Country Gables Shopping Center, Granite Bay, CA 2,704 12,684 0 809
Pinecreek Shopping Center, Grass Valley, CA
(50% interest)(2) 2,725 7,966 0 124
Heritage Oak Shopping Center, Gridley, CA 1,603 3,597 0 117
Centennial Plaza Shopping Center, Hanford, CA 2,225 8,935 0 83
Plaza 580 Shopping Center, Livermore, CA 2,941 11,768 403 765
Canal Farms Shopping Center, Los Banos, CA 1,180 6,904 0 594
Mission Ridge Shopping Center, Manteca, CA 2,373 9,552 0 161
Century Center, Modesto, CA 2,950 14,568 0 (40)
Currier Square Shopping Center, Oroville, CA 2,025 7,203 0 961
Eastridge Plaza Shopping Center, Porterville, CA 939 4,390 0 64
Belle Mill Landing, Red Bluff, CA 2,247 6,043 0 1,927
Cobblestone Shopping Center, Redding, CA 2,375 7,969 0 228
Kmart Center, Sacramento, CA 1,875 3,116 0 651
Elverta Crossing Shopping Center, Sacramento, CA 3,370 7,477 0 677
Heritage Park Shopping Center, Suisun, CA 3,575 12,187 0 385
Heritage Place Shopping Center, Tulare, CA 1,427 7,117 0 525
Blossom Valley Plaza, Turlock, CA 2,448 8,315 0 439
Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,119 0 348
Park Place Shopping Center, Vallejo, CA 3,850 11,291 109 1,113
Lakewood Village, Windsor, CA 10,009 4,175 16,761 0 0
Yreka Junction, Yreka, CA 1,350 5,846 288 1,071
Raley's Shopping Center, Yuba City, CA 2,101 5,151 0 1,415
Eagle Station Shopping Center, Carson City, NV 1,735 7,585 0 223
Elko Junction Shopping Center, Elko, NV 2,516 7,631 (184) 6,574
Dodge Center, Fallon, NV (3) 405 1,595 0 32
Caughlin Ranch Shopping Center, Reno, NV 2,950 7,123 0 443
North Hills Shopping Center, Reno, NV 5,406 6,911 (304) 91
Blaine International Center, Blaine, WA 1,509 6,102 0 114
----------------------------------------------------------
Total Shopping Center 10,009 83,061 288,600 312 25,419
<CAPTION>
Column E Column F Column G
--------------------------------------------- ------------- -------------
Gross amount at which carried at close
of period
---------------------------------------------
Properties
Operating
under Direct
Buildings and Financing Accumulated Date of
Land Improvements Leases Total Depreciation Construction
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shopping Center
- ---------------
Anderson Square, Anderson, CA $1,145 $2,501 $3,646 $923 1979
Angel's Camp Town Center, Angels Camp, CA 580 4,595 5,175 1,813 1986
Skypark Plaza Shopping Center, Chico, CA 2,854 12,714 15,568 4,037 1985/1991
Coalinga Shopping Center, Coalinga, CA 816 3,103 3,919 1,258 1977
Serra Center, Colma, CA (30% interest)(1) 433 1,374 1,807 773 1972
Mercantile Row Shopping Center, Dinuba, CA 1,440 6,272 7,712 1,650 1990
Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,210 14,001 1,671 1993
Northridge Shopping Center, Fair Oaks, CA 1,666 7,005 8,671 1,066 1958/1986
Commonwealth Square Shopping Center, Folsom, CA 3,312 13,867 17,179 3,793 1988/1997
Victorian Walk Shopping Center, Fresno, CA 1,120 7,578 8,698 2,468 1988
Country Gables Shopping Center, Granite Bay, CA 2,704 13,493 16,197 3,423 1988
Pinecreek Shopping Center, Grass Valley, CA
(50% interest)(2) 2,725 8,090 10,815 2,619 1988
Heritage Oak Shopping Center, Gridley, CA 1,603 3,714 5,317 1,358 1981
Centennial Plaza Shopping Center, Hanford, CA 2,225 9,018 11,243 1,334 1991
Plaza 580 Shopping Center, Livermore, CA 3,344 12,533 15,877 1,805 1993/1996
Canal Farms Shopping Center, Los Banos, CA 1,180 7,498 8,678 2,659 1988
Mission Ridge Shopping Center, Manteca, CA 2,373 9,713 12,086 1,439 1993
Century Center, Modesto, CA 2,950 14,528 17,478 469 1979
Currier Square Shopping Center, Oroville, CA 2,025 8,164 10,189 2,492 1969/1989
Eastridge Plaza Shopping Center, Porterville, CA 939 4,454 5,393 1,739 1985
Belle Mill Landing, Red Bluff, CA 2,247 7,970 10,217 2,680 1982/1987/1994
Cobblestone Shopping Center, Redding, CA 2,375 8,197 10,572 2,828 1984
Kmart Center, Sacramento, CA 1,875 3,767 5,642 1,479 1964/1986
Elverta Crossing Shopping Center, Sacramento, CA 3,370 8,154 11,524 1,971 1991/1993
Heritage Park Shopping Center, Suisun, CA 3,575 12,572 16,174 3,560 1989
Heritage Place Shopping Center, Tulare, CA 1,427 7,642 9,069 2,890 1986
Blossom Valley Plaza, Turlock, CA 2,448 8,754 11,202 2,366 1988/1991
Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,467 10,392 2,681 1986
Park Place Shopping Center, Vallejo, CA 3,959 12,404 16,363 3,540 1987
Lakewood Village, Windsor, CA 4,175 16,761 20,936 496 1993/1995
Yreka Junction, Yreka, CA 1,638 6,917 8,555 2,092 1984/1997
Raley's Shopping Center, Yuba City, CA 2,101 6,566 8,667 2,138 1963/1984
Eagle Station Shopping Center, Carson City, NV 1,735 7,808 9,543 2,356 1982
Elko Junction Shopping Center, Elko, NV 2,332 14,205 16,537 2,922 1986/1991/1994
Dodge Center, Fallon, NV (3) 405 1,627 2,032 1,224 1976
Caughlin Ranch Shopping Center, Reno, NV 2,950 7,566 10,516 1,923 1990/1991
North Hills Shopping Center, Reno, NV 5,102 7,002 12,104 2,409 1986
Blaine International Center, Blaine, WA 1,509 6,216 7,725 52 1991
--------------------------------------------------------------
Total Shopping Center 83,373 314,019 0 397,419 78,396
<CAPTION>
Column H Column I
------------ -------------
Life on
which
depreciation
in the latest
income
Date statement is
Acquired computed
- ---------------------------------------------------------------------------
<S> <C> <C>
Shopping Center
- ---------------
Anderson Square, Anderson, CA 1987 5 to 31
Angel's Camp Town Center, Angels Camp, CA 1985 5 to 31
Skypark Plaza Shopping Center, Chico, CA 1988 3 to 31
Coalinga Shopping Center, Coalinga, CA 1987 3 to 31
Serra Center, Colma, CA (30% interest)(1) 1973/1988 6 to 31
Mercantile Row Shopping Center, Dinuba, CA 1990 3 to 31
Laguna 99 Shopping Center, Elk Grove, CA 1994 3 to 31
Northridge Shopping Center, Fair Oaks, CA 1994 5 to 31
Commonwealth Square Shopping Center, Folsom, CA 1990 3 to 31
Victorian Walk Shopping Center, Fresno, CA 1988 5 to 31
Country Gables Shopping Center, Granite Bay, CA 1991 3 to 31
Pinecreek Shopping Center, Grass Valley, CA
(50% interest)(2) 1989 5 to 31
Heritage Oak Shopping Center, Gridley, CA 1987 6 to 31
Centennial Plaza Shopping Center, Hanford, CA 1994 3 to 31
Plaza 580 Shopping Center, Livermore, CA 1994/1996 4 to 31
Canal Farms Shopping Center, Los Banos, CA 1986 3 to 32
Mission Ridge Shopping Center, Manteca, CA 1994 5 to 31
Century Center, Modesto, CA 1998 31
Currier Square Shopping Center, Oroville, CA 1989 4 to 31
Eastridge Plaza Shopping Center, Porterville, CA 1985 3 to 35
Belle Mill Landing, Red Bluff, CA 1987 3 to 31
Cobblestone Shopping Center, Redding, CA 1988 3 to 31
Kmart Center, Sacramento, CA 1986 4 to 31
Elverta Crossing Shopping Center, Sacramento, CA 1990 3 to 31
Heritage Park Shopping Center, Suisun, CA 1990 3 to 31
Heritage Place Shopping Center, Tulare, CA 1987 5 to 31
Blossom Valley Plaza, Turlock, CA 1990 3 to 31
Ukiah Crossroads Shopping Center, Ukiah, CA 1989 2 to 31
Park Place Shopping Center, Vallejo, CA 1990 3 to 31
Lakewood Village, Windsor, CA 1998 31
Yreka Junction, Yreka, CA 1990/1997 5 to 31
Raley's Shopping Center, Yuba City, CA 1986 5 to 40
Eagle Station Shopping Center, Carson City, NV 1989 3 to 31
Elko Junction Shopping Center, Elko, NV 191988/1993 73 to 31 7
Dodge Center, Fallon, NV (3) 1977 24 to 31
Caughlin Ranch Shopping Center, Reno, NV 1990 3 to 31
North Hills Shopping Center, Reno, NV 1988/1993 3 to 31
Blaine International Center, Blaine, WA 1998 31
Total Shopping Center
</TABLE>
<PAGE>
Western Investment Real Estate Trust
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998
(In thousands except for dates of contruction and acquisition
and depreciable lives)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------ ------------- ------------------------- -------------------------
Cost capitalized/(sold)
Initial cost to company Subsequent to acquisition
----------------------- -------------------------
Buildings and
Property Name Encumbrance Land Improvements Land Improvements
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Single Tenant
- -------------
Nob Hill General Stores, Hollister, CA (3) 960 3,869 0 0
Kmart, Napa, CA
Nob Hill General Stores, Watsonville, CA (3) 416 1,084 0 0
Raley's Supermarket, Fallon, NV (3) 1,000 3,220 0 0
West Town, Winnemuca, NV 130 3,386 0 0
----------------------------------------------------
Total Single Tenant 0 2,506 11,559 0 0
Commercial
- ----------
Coast Savings & Loan, Cupertino, CA (3) 615 845 0 0
Heald Business College, Milpitas, CA (3) 979 6,020 0 684
Coast Savings & Loan, Monterey, CA 911 2,189 0 0
Redwood II, Petaluma, CA (3) 1,017 3,052 0 813
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
Viking Freight Systems, Santa Clara, CA (3) 548 0 0 0
Coast Savings & Loan, Santa Cruz, CA 205 823 0 0
----------------------------------------------------
Total Commercial 0 7,480 18,612 0 1,776
====================================================
Total All Properties $10,009 $93,047 $318,771 $312 $27,195
====================================================
<CAPTION>
Column E Column F Column G
--------------------------------------------- ------------- -------------
Gross amount at which carried at close
of period
---------------------------------------------
Properties
Operating
under Direct
Buildings and Financing Accumulated Date of
Land Improvements Leases Total Depreciation Construction
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Single Tenant
- -------------
Nob Hill General Stores, Hollister, CA (3) 960 3,869 4,829 492 1994
Kmart, Napa, CA 133 133 N/A 1964
Nob Hill General Stores, Watsonville, CA (3) 416 1,084 1,500 700 1982
Raley's Supermarket, Fallon, NV (3) 1,000 3,220 4,220 805 1991
West Town, Winnemuca, NV 130 3,386 3,516 1,879 1978/1991
------------------------ --------------------------------
Total Single Tenant 2,506 11,559 133 14,198 3,876
Commercial
- ----------
Coast Savings & Loan, Cupertino, CA (3) 615 845 1,460 442 1980
Heald Business College, Milpitas, CA (3) 979 6,704 7,683 2,408 1987
Coast Savings & Loan, Monterey, CA 911 2,189 3,100 1,138 1963
Redwood II, Petaluma, CA (3) 1,017 3,865 4,882 952 1985
Coast Savings & Loan, Salinas, CA (3) 516 1,632 2,148 429 1937
Coast Savings & Loan (Market St), San Francisco, CA 873 1,068 1,941 555 1964
Coast Savings & Loan (Taraval St), San Francisco, CA 366 1,824 2,190 949 1975
3450 California St., San Francisco, CA 1,450 1,438 2,888 708 1957/1987
Viking Freight Systems, Santa Clara, CA (3) 548 0 986 1,534 N/A 1978
Coast Savings & Loan, Santa Cruz, CA 205 823 1,028 259 1980
------------------------ --------------------------------
Total Commercial 7,480 20,388 986 28,854 7,840
======================== ================================
Total All Properties $93,359 $345,966 $1,119 $440,471 $90,112
======================== ================================
<CAPTION>
Column H Column I
------------ -------------
Life on
which
depreciation
in the latest
income
Date statement is
Acquired computed
- -------------------------------------------------------------------------------------
<S> <C> <C>
Single Tenant
- -------------
Nob Hill General Stores, Hollister, CA (3) 1994 31
Kmart, Napa, CA 1966 N/A
Nob Hill General Stores, Watsonville, CA (3) 1982 25
Raley's Supermarket, Fallon, NV (3) 1991 31
West Town, Winnemuca, NV 1978 25 to 31
Total Single Tenant
Commercial
- ----------
Coast Savings & Loan, Cupertino, CA (3) 1985 25
Heald Business College, Milpitas, CA (3) 1987 10 to 31
Coast Savings & Loan, Monterey, CA 1985 25
Redwood II, Petaluma, CA (3) 1989 5 to 31
Coast Savings & Loan, Salinas, CA (3) 1986 40
Coast Savings & Loan (Market St), San Francisco, CA 1986 25
Coast Savings & Loan (Taraval St), San Francisco, CA 1985 25
3450 California St., San Francisco, CA 1987 10 to 31
Viking Freight Systems, Santa Clara, CA (3) 1978 N/A
Coast Savings & Loan, Santa Cruz, CA 1986 40
Total Commercial
Total All Properties
</TABLE>
(1) Serra Center is encumbered by a note and deed of trust under which the
70% co-owner is the borrower.
(2) Pinecreek is encumbered by a note and deed of trust under which the 50%
co-owner is the borrower.
(3) The Company 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, 1998 as follows:
<TABLE>
<S> <C>
Basis for federal income tax purposes $341,863
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 7,203
Miscellaneous differences 53
---------
Financial statement reporting basis $345,966
=========
</TABLE>
59
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
1998 BUILDING IMPROVEMENT AND LEASING RELATED COST ADDITIONS (Unaudited)
<TABLE>
<CAPTION>
LEASING
NAME LOCATION IMPROVEMENT RELATED COST
---- -------- ----------- ------------
SHOPPING CENTERS
----------------
<S> <C> <C> <C> <C>
72 ANDERSON SQUARE ANDERSON, CA $8 $5
50 ANGELS CAMP TOWN CENTER ANGELS CAMP, CA 20 7
80 SKYPARK PLAZA CHICO, CA 196 17
67 COALINGA COALINGA, CA 22 2
39 SERRA CENTER (30%) COLMA, CA 112 18
89 MERCANTILE ROW DINUIBA, CA 3 5
94 LAGUNA 99 PLAZA ELK GROVE, CA 23 6
96 NORTHRIDGE FAIR OAKS, CA 244 29
68 COMMONWEALTH SQUARE FOLSOM, CA 42 34
78 VICTORIAN WALK FRESNO, CA 18 1
69 COUNTRY GABLES GRANITE BAY, CA 151 39
82 PINECREEK (50%) GRASS VALLEY, CA 12 35
70 HERITAGE OAK GRIDLEY, CA 17 -
93 CENTENNIAL PLAZA HANFORD, CA - 8
97 PLAZA 580 LIVERMORE, CA 91 24
61 CANAL FARMS LOS BANOS, CA - 8
95 MISSION RIDGE PLAZA MANTECA, CA 8 12
101 CENTURY CENTER MODESTO, CA 17 13
84 CURRIER SQUARE OROVILLE, CA 218 26
49 EASTRIDGE PLAZA PORTERVILLE, CA 5 -
71 BELLE MILL LANDING RED BLUFF, CA 61 2
77 COBBLESTONE REDDING, CA 43 9
62 KMART CENTER SACRAMENTO, CA 81 6
91 ELVERTA CROSSING SACRAMENTO, CA 6 19
81 HERITAGE PARK SUISUN, CA 27 22
51 HERITAGE PLACE TULARE, CA 50 6
66 BLOSSOM VALLEY PLAZA TURLOCK, CA 29 3
86 CROSSROADS UKIAH, CA 21 9
65 PARK PLACE VALLEJO, CA 54 4
102 LAKEWOOD VILLAGE WINDSOR, CA - 10
85 YREKA JUNCTION YREKA, CA (11) 5
59 RALEY'S CENTER YUBA CITY, CA 24 26
83 EAGLE STATION CARSON CITY, NV 55 36
79 ELKO JUNCTION ELKO, NV 320 57
76 NORTH HILLS RENO, NV 19 14
88 CAUGHLIN RANCH RENO, NV 55 17
105 BLAINE INTERNATIONAL CENTER BLAINE, WA 114 2
SUBTOTAL - SHOPPING CENTERS $1,647 $ 446
-------- ------
<CAPTION>
COMMERCIAL
----------
<S> <C> <C> <C> <C>
74 REDWOOD II PETALUMA, CA $813 $187
64 3450 CALIFORNIA STREET SAN FRANCISCO, CA - 37
-------- ------
SUBTOTAL - COMMERCIAL $ 813 $ 224
-------- ------
TOTAL $ 2,460 $ 670
======== ======
</TABLE>
60
<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 13, 1999, 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 13, 1999, 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 13, 1999, 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.
61
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following table details Officer loans with the Company as of December 31,
1998:
<TABLE>
<CAPTION>
Name Amounts Maturity Date Interest Rate
----------------------- ------------------ ---------------------- ---------------
<S> <C> <C> <C>
Brad Blake $ 499,831(1) February 28, 2001 5.58%
Dennis Ryan 300,000(1) February 28, 2001 5.58%
Josh Smith 250,000(1) February 28, 2001 5.58%
Jerry Hunt 250,000(1) February 28, 2001 5.58%
Brad Blake 283,750(2) October 30, 2008 7.50%
Dennis Ryan 283,750(2) October 30, 2008 7.50%
----------------------- ------------------ ---------------------- ---------------
$1,867,331
======================= ================== ====================== ===============
</TABLE>
(1) The loan proceeds were used to fund the purchase of Company shares
of beneficial ownership by these individuals in order to increase
their ownership in the Company and to more closely align their
interests with those of the stockholders.
(2) The loan proceeds were used to fund their acquisition of the common
stock of Western Real Estate Services, Inc. (WRESI), in which the
Company has a 97% economic interest. WRESI was formed to facilitate
the acquisition of Kienow's (see Note 5 to the consolidated financial
statements).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) 1. Consolidated Financial Statements - Included in Item 8 PAGE
------
<S> <C> <C>
Report of Independent Certified Public Accountants 36
Consolidated Balance Sheets - December 31, 1998 and 1997 37
Consolidated Financial Statements for the Years
Ended December 31, 1998, 1997 and 1996:
Consolidated Statements of Income 38
Consolidated Statements of Shareholders' Equity 39
Consolidated Statements of Cash Flows 40
Notes to Consolidated Financial Statements 41-57
2. Financial Statement Schedule III: Real Estate and
Accumulated Depreciation 58-59
3. Additional Information: 1998 Building Improvement
and Leasing Related Cost Additions (unaudited) 60
(b) 1. Reports on Form 8-K.
Form 8-K dated September 29, 1998 contained an Item
5 disclosure announcing the Company's agreement to
acquire control of Kienow's Food Stores, Inc.
Form 8-K dated October 30, 1998 contained an Item 5
disclosure announcing the completion of the
Company's acquisition of Kienow's Food Store, Inc.
62
<PAGE>
<CAPTION>
(c) Exhibits. PAGE
-----
<S> <C> <C>
(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).
(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 fiscal year 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).
63
<PAGE>
<CAPTION>
PAGE
----
<S> <C> <C>
(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, LP 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).
(12) * Computation of Ratio of Earnings to Fixed
Charges for the year ended December 31, 1998,
1997, 1996, 1995, 1994. 66
(23) * Consent of Independent Certified Public Accountants 67
(27) * Financial Data Schedule
</TABLE>
- ----------
* Filed with this report.
** Management contract or compensatory plan or arrangement.
64
<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/ Robert J. McLaughlin Chairman March 30, 1999
- ------------------------------------------ of the Board -----------------
Robert J. McLaughlin and Trustee
s/ Bradley N. Blake President, March 30, 1999
- ------------------------------------------ Chief Executive Officer -----------------
Bradley N. Blake and Trustee
s/ Dennis D. Ryan Executive Vice President, March 30, 1999
- ------------------------------------------ Chief Financial Officer -----------------
Dennis D. Ryan and Trustee
s/ Joseph Colmery Trustee March 30, 1999
- ------------------------------------------ -----------------
Joseph Colmery
s/ L. Michael Foley Trustee March 30, 1999
- ------------------------------------------ -----------------
L. Michael Foley
s/ Reginald B. Oliver Trustee March 30, 1999
- ------------------------------------------ -----------------
Reginald B. Oliver
s/ James L. Stell Trustee March 30, 1999
- ------------------------------------------ -----------------
James L. Stell
</TABLE>
65
<PAGE>
Exhibit 12
Western Investment Real Estate Trust
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income $ 13,616 $ 12,880 $ 12,231 $ 10,304 $ 15,266
Fixed charges - interest and amortization of loan fees 13,414 11,511 11,289 11,537 10,063
-----------------------------------------------------------------
Earnings before interest and amortization of loan fees $ 27,030 $ 24,391 $ 23,520 $ 21,841 $ 25,329
--------- --------- --------- --------- ---------
Fixed charges - interest capitalized $ 275 $ 12 $ 126 $ 29 $ -
--------- --------- --------- --------- ---------
Total fixed charges $ 13,689 $ 11,523 $ 11,417 $ 11,566 $ 10,063
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges 1.97 2.12 2.06 1.89 2.52
--------- --------- --------- --------- ---------
</TABLE>
66
<PAGE>
Exhibit 23
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/A, the registration statement (No. 33-27016) on
Form S-8 and the registration statement (No. 33-60777) on Form S-8 of Western
Investment Real Estate Trust of our report dated February 3, 1999, except for
Note 17, which is as of March 1, 1999, relating to the consolidated balance
sheets of Western Investment Real Estate Trust as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1998, and the related financial statement schedule, which report appears
in the December 31, 1998, annual report on Form 10-K of Western Investment
Real Estate Trust.
KPMG LLP
San Francisco, California
February 3, 1999
67
<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 DECEMBER 31, 1998 AND THE
BALANCE SHEET AT DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1512
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 410183
<DEPRECIATION> 82660
<TOTAL-ASSETS> 426891
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 220503
0
0
<COMMON> 241741
<OTHER-SE> (62117)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 426891
<SALES> 0
<TOTAL-REVENUES> 53354
<CGS> 0
<TOTAL-COSTS> 13665<F4>
<OTHER-EXPENSES> 15134<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13414
<INCOME-PRETAX> 13616
<INCOME-TAX> 0
<INCOME-CONTINUING> 13616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13616
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.78
<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 (9,253) and Other Operating
Expenses (4,412).
<F5>Amount comprised of Depreciation expense (12,401) and General and
Administrative expense (2,733).
</FN>
</TABLE>
