<PAGE>
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-08723
WESTERN PROPERTIES 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
---------------------------
WESTERN INVESTMENT REAL ESTATE TRUST
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares of Beneficial Interest, No Par Value - 17,231,349 shares as
of October 26, 1999
1
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WESTERN PROPERTIES TRUST
INDEX TO 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited) 3
Consolidated Balance Sheets - September 30, 1999, and December 31, 1998 4
Consolidated Statements of Income - Three and Nine months ended
September 30, 1999 and 1998 5
Consolidated Statements of Shareholders' Equity - Nine months ended
September 30, 1999 and year ended December 31, 1998 6
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis of Financial 17-21
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22-23
SIGNATURE 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
The financial statements included in this report have been prepared by the
Company, without audit, pursuant to the rules of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules. Interim
results are not necessarily indicative of results for a full year. The interim
financial statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim periods
presented in accordance with the instructions to Form 10-Q.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's latest annual
report on Form 10-K. When necessary, reclassifications have been made to prior
period balances to conform to current period presentation.
When used in the discussion in this Form 10-Q, the words "believes," "expects,"
"intends," "anticipates" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
discussed, including, but not limited to those set forth in the section entitled
"Potential Factors Affecting Future Operating Results," in Management's
Discussion and Analysis of Financial Condition and Results of Operations, below.
Readers are cautioned not to place undue reliance on the forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to the
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
3
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS WESTERN PROPERTIES TRUST
- --------------------------------------------------------------------------------------------------------------------
(Unaudited. In thousands, except share data)
SEPTEMBER 30, December 31,
ASSETS 1999 1998
------------------------ -------------------
<S> <C> <C>
Real estate investments:
Real estate properties ................................................. $ 403,170 $ 410,183
Less accumulated depreciation and amortization ......................... (87,355) (82,660)
--------- ---------
315,815 327,523
Real estate properties held for sale ................................... 27,111 30,288
Less accumulated depreciation and amortization ......................... (7,246) (7,452)
--------- ---------
19,865 22,836
Unconsolidated real estate subsidiary ................................. 44,153 43,854
Mortgage notes receivable ............................................. 16,941 16,160
--------- ---------
Real estate investments, net of accumulated depreciation ........... 396,774 410,373
Cash and cash equivalents ................................................. 458 1,512
Accounts receivable and other assets ...................................... 17,066 13,704
Deferred long-term debt issuance costs, net ............................... 1,254 1,302
--------- ---------
$ 415,552 $ 426,891
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
bank line of credit ....................................................... $ 77,150 $ 85,700
Senior notes, net ......................................................... 124,815 124,794
Mortgage payable .......................................................... 9,859 10,009
--------- ---------
211,824 220,503
Interest payable .......................................................... 1,394 3,670
Prepaid rents and security deposits ....................................... 1,969 2,161
Other liabilities ......................................................... 4,163 3,517
--------- ---------
Total liabilities ...................................................... 219,350 229,851
--------- ---------
Minority interests ........................................................ 17,416 17,416
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized;
No shares issued or outstanding ..................................... -- --
Shares of beneficial interest, no par value,
Unlimited share authorization
Issued and outstanding: September 30, 1999 - 17,231,349 shares
December 31, 1998 - 17,216,550 shares ...... 242,200 241,741
Accumulated dividends in excess of net income .......................... (63,414) (62,117)
--------- ---------
Total shareholders' equity ............................................. 178,786 179,624
--------- ---------
$ 415,552 $ 426,891
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME WESTERN PROPERTIES TRUST
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited. In thousands, except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
REVENUES:
Minimum rents .................................................. $ 10,939 $ 10,582 $ 33,039 $ 31,098
Percentage rents ............................................... 344 45 718 489
Recoveries from tenants ........................................ 2,092 1,742 6,521 5,514
Interest income ................................................ 425 350 1,296 528
Income from unconsolidated real estate subsidiary .............. 113 -- 258 --
Other income ................................................... 264 250 694 545
------------ ------------ ------------ ------------
Total revenues ...................................................... 14,177 12,969 42,526 38,174
------------ ------------ ------------ ------------
EXPENSES:
Interest ....................................................... 3,500 3,474 10,550 9,747
Property operating costs ....................................... 2,251 1,894 7,012 5,994
Depreciation and amortization .................................. 2,959 3,141 8,884 9,314
Other operating expenses ....................................... 1,437 1,136 3,872 3,158
General and administrative ..................................... 712 587 2,226 2,174
------------ ------------ ------------ ------------
Total expenses ...................................................... 10,859 10,232 32,544 30,387
------------ ------------ ------------ ------------
Income before gains (loss) on sales of real estate investments
3,318 2,737 9,982 7,787
Gains (loss) on sales of real estate investments .................... 2,313 -- 4,426 (30)
------------ ------------ ------------ ------------
Income before minority interest ................................ 5,631 2,737 14,408 7,757
Minority interest ................................................... 401 -- 1,203 _ --
------------ ------------ ------------ ------------
Net income .......................................................... $ 5,230 $ 2,737 $ 13,205 $ 7,757
============ ============ ============ ============
Basic net income per share .......................................... $ 0.30 $ 0.16 $ 0.77 $ 0.45
============ ============ ============ ============
Diluted net income per share ........................................ $ 0.30 $ 0.16 $ 0.77 $ 0.45
============ ============ ============ ============
Cash dividends paid per share ....................................... $ 0.28 $ 0.28 $ 0.84 $ 0.84
============ ============ ============ ============
Weighted average number of shares outstanding--Basic ................ 17,227,916 17,210,772 17,222,911 17,204,382
============ ============ ============ ============
Weighted average number of shares outstanding--Diluted .............. 18,695,086 17,249,265 17,260,494 17,256,348
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN PROPERTIES TRUST
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited. In thousands, except share data)
Nine Months Ended September 30, 1999,
and Year Ended December 31, 1998
(In thousands, except share data)
Accumulated
Shares of Dividends Total
Beneficial Interest in Excess of Shareholders'
Number Amount Net Income Equity
-------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 ..................... 17,191,860 $ 242,682 $ (56,433) $ 186,249
Net proceeds from issuance of shares ......... 12,453 182 -- 182
Shares issued under restricted stock plan .... 12,237 176 -- 176
Loans to officers ............................ -- (1,299) -- (1,299)
Net income ................................... -- -- 13,616 13,616
Cash dividends ............................... -- -- (19,300) (19,300)
---------- ---------- ---------- ----------
Balance, December 31, 1998 ................... 17,216,550 241,741 (62,117) 179,624
Shares issued under restricted stock plan .... 14,799 199 -- 199
Forgiveness of loans to officers ............. -- 260 -- 260
Net income ................................... -- -- 13,205 13,205
Cash dividends ............................... -- -- (14,502) (14,502)
---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1999 .................. 17,231,349 $ 242,200 $ (63,414) $ 178,786
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS WESTERN PROPERTIES TRUST
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited. In thousands) Nine Months Ended
September 30,
1999 1998
-----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................... $ 13,205 $ 7,757
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest .................................................................. 1,203 --
Depreciation and amortization ...................................................... 8,884 9,314
Amortization of deferred debt issuance costs ....................................... 359 267
(Gains) loss on sales of real estate investments ................................... (4,426) 30
Earned compensation on restricted stock plan ....................................... 199 125
Increase in accounts receivable and other assets ................................... (2,220) (603)
Increase in deferred rent receivable ............................................... (425) (193)
Decrease in interest payable ....................................................... (2,276) (2,200)
Increase in prepaid rents and security deposits and other liabilities .............. 454 1,862
Forgiveness of loans to officers .................................................. 260 --
-------- --------
Net cash provided by operating activities .......................................... 15,212 16,359
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of real estate investments ........................................... 13,451 340
Investment in notes receivable, net ..................................................... (1,581) (14,625)
Acquisition of real estate investments .................................................. -- (35,858)
Investment in unconsolidated real estate subsidiary ...................................... (299) --
Funds released from escrow ............................................................... 2,625 7,117
Funds escrowed pending acquisition ....................................................... (2,926) --
Improvements of real estate investments:
Build-to-suit developments ......................................................... (518) (221)
New leases ......................................................................... (1,619) (1,971)
General ............................................................................ (818) (454)
Recovery of investment in direct financing leases ........................................ 114 280
-------- --------
Net cash provided by (used in) investing activities ................................ 8,429 (45,392)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank line .................................................................... 33,000 73,100
Principal payments on bank line .......................................................... (41,550) (28,550)
Principal payments on mortgage note payable .............................................. (150) (106)
Loans to officers ........................................................................ -- (1,299)
Net proceeds from issuance of shares ..................................................... -- 182
Deferred long term issuance costs ........................................................ (290) (242)
Cash distributions to minority interest .................................................. (1,203) --
Cash dividends paid ...................................................................... (14,502) (14,460)
-------- --------
Net cash (used in) provided by financing activities ................................ (24,695) 28,625
-------- --------
Net decrease in cash and cash equivalents .......................................... (1,054) (408)
Cash and cash equivalents, at the beginning of period ................................... 1,512 1,463
-------- --------
Cash and cash equivalents, at the end of period .......................................... $ 458 $ 1,055
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of $1,052 interest capitalized in 1999 ..... $ 13,518 $ 11,699
======== ========
NON CASH FINANCING ACTIVITIES:
Real estate acquisition debt ............................................................. $ -- $ 10,266
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
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WESTERN PROPERTIES TRUST
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
Note 1: ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING
PRONOUNCEMENTS
(A) DESCRIPTION OF ORGANIZATION
Founded in 1962, Western Properties Trust ("Western") and its affiliates own and
operate community and neighborhood shopping centers and other real estate
located in the western United States. The corporate office of the
self-administered equity real estate investment trust is in the San Francisco
Bay Area City of Emeryville, California. Its shares are traded on the American
Stock Exchange under the symbol "WIR".
On August 19, 1999, pursuant to authority granted the Board of Trustees under
Western's Declaration of Trust, Western changed its name from Western Investment
Real Estate Trust to Western Properties Trust.
The accompanying consolidated financial statements include the accounts of
Western, Western/Kienow's L.P. and a joint venture in which Western has a
controlling financial interest (collectively, "the Company"). Western is the
sole general partner in Western/Kienow's L.P. At September 30, 1999, the
Company's real estate portfolio was comprised of 63 investments, 53 of which
were retail properties.
(B) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES. The Company
adopted SOP 98-5 in its first quarter 1999 financial statements, the effective
date of SOP 98-5. Accordingly, the Company expensed approximately $57,000 of
organizational costs in the quarter ended March 31, 1999. These costs had been
previously capitalized. This amount has been included in general and
administrative expenses for the three months ended March 31, 1999.
8
<PAGE>
Note 2: REAL ESTATE INVESTMENTS
At September 30, 1999, the Company had direct and indirect investments in 63
properties, totaling 5.6 million leasable square feet. Included in this total
are nine properties which were held for sale and which total 262,000 leasable
square feet.
Occupancy percentages for the Company's portfolio is as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998 September 30, 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Shopping centers(1) (3) 93.2% 92.5% 92.2%
Single-tenant retail 62.2%(2) 100.0% 100.0%
Commercial and other 94.4% 96.1% 96.2%
Overall occupancy 91.6% 93.1% 93.0%
</TABLE>
Occupancy percentage is based on square footage leased as a percent of total
leasable square feet.
(1) "Same Store" shopping centers (i.e. those shopping centers owned for the
entire two-year period ended September 30, 1999) occupancy was 94.1% and
92.9% at September 30, 1999 and 1998, respectively.
(2) The single-tenant retail occupancy rate reflects the January, 1999
expiration of the Kmart/Napa lease of 103,284 square feet, the only
difference to the December 31, 1998 occupancy.
(3) The 10 Portland, Oregon retail properties that are held through an
unconsolidated subsidiary (Kienow's Food Store, Inc.) are included in the
63 properties but are not included in the above occupancy percentages.
These properties are undergoing extensive retenanting and redevelopment.
During the quarter ended September 30, 1999, the Company sold one single tenant
property and one undeveloped parcel, as follows:
- - On September 13, 1999, the Company sold a 26,500 square foot grocery
store located in Watsonville, California, for $3,000,000, at a gain of
$2,124,000. The Company plans on using the sales proceeds of $2,926,000
from this disposition to purchase real estate through a tax-deferred
exchange.
- - On August 17, 1999, the Company sold a 35,326 square foot parcel of
undeveloped land located in Elko, Nevada for $280,000, at a gain of
$189,000. The sales proceeds were used to reduce the balance on the bank
line.
Also during the quarter, the Company entered into agreements for the development
of retail properties:
- The Company formed a California Limited Liability Company,
together with The Innisfree Companies, for the purpose of
developing a retail project in Redwood City, California. As of
September 30, 1999, the Company has funded $274,000 of
predevelopment costs. Total project costs are expected to be
approximately $34 million. The Company expects to acquire the land
and commence construction in the second or third quarter of 2000.
The Company anticipates financing the project through a joint
venture, property disposition proceeds and/or through a
third-party construction loan.
9
<PAGE>
- The Company entered into purchase and sale agreements to acquire
two parcels of land in the downtown area of Walnut Creek,
California, which will be part of a retail development project.
This site is located immediately north of the Plaza Escuela
(formerly Simon Hardware site) property on which the Company is
providing development financing in the form of a participating
mortgage loan. Total project costs for this development project
are expected to be approximately $31 million. The Company expects
to close on the purchase of the parcels during the fourth quarter
of 1999 and commence construction in the second or third quarter
of 2000. The Company anticipates financing the project through a
joint venture, property disposition proceeds and/or through a
third-party construction loan.
Note 3: UNCONSOLIDATED REAL ESTATE SUBSIDIARY
In October 1998, the Company acquired Kienow's Food Stores, Inc. (Kienow's), a
Portland, Oregon-based grocery wholesaler and retailer, whose principal assets
were its real estate properties comprising six shopping centers, four
freestanding stores and eight non-core properties. The Company intends to
redevelop and retenant the 10 core retail properties (six shopping centers and
four freestanding stores), encompassing 449,217 square feet, located in the
greater Portland area. From inception to September 30, 1999, the Company
capitalized $1,304,000 ($255,000 in 1998) in interest in connection with the
redevelopment of the 10 core retail properties.
As of September 30, 1999, the Company has executed seven anchor tenant leases
and completed the disposition of five non-core properties in Oregon.
10
<PAGE>
Note 4: CAPITAL EXPENDITURES
COSTS CAPITALIZED DURING THE PERIOD
It is the Company's practice to capitalize expenditures that exceed $4,000 and
which are associated with the improvement and rental of real estate investments.
Capitalized costs include leasing-related costs and property improvements.
Capital expenditures for the three and nine months ended September 30, 1999, and
1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------------- ---------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
"Build to Suit" capital improvements................. $ 518 $ 113 $ 518 $ 221
Capitalized costs incurred in connection with
leasing previously UNLEASED space............... 30 33 43 68
Capitalized costs incurred in connection with
leasing previously LEASED space................. 505 1,124 1,576 1,903
Capitalized costs which relate to
improvements to common areas.................... 140 161 818 454
------ ------ ------ ------
Total Capitalized expenditures ..................... $1,193 $1,431 $2,955 $2,646
====== ====== ====== ======
Improvements......................................... $1,121 $1,247 $2,835 $2,086
Leasing-related costs................................ 72 184 120 560
------ ------ ------ ------
Total capitalized expenditures ..................... $1,193 $1,431 $2,955 $2,646
====== ====== ====== ======
</TABLE>
COSTS ASSOCIATED WITH LEASING ACTIVITY DURING THE PERIOD
During the three months ended September 30, 1999, the Company entered into
leases that obligate the Company to fund certain tenant improvement obligations.
These obligations relate to both new leases and lease renewals. A portion of
these obligations were paid and capitalized during the quarter ended September
30, 1999, and are reflected in the preceding table. At September 30, 1999, the
Company had commitments under new leases and lease renewals which will result in
expenditures of approximately $900,000 in real estate improvements and leasing
commissions.
11
<PAGE>
The aggregate and per-square-foot information representing expenditures
associated with leasing during the three months ended September 30, 1999, is as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NEW LEASES
TENANT IMPROVEMENTS
Property Type Capitalized Costs All Expenditures
- ---------------------------- --------------------------------------- ------------------------------------------
Per Per
Aggregate Square Square Aggregate Square Square
Amount Feet Foot Amount Feet Foot
------------- ------------- ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shopping center &
single-tenant retail
properties $656,367 34,245 $19.17 $670,667 52,022 $12.89
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LEASING COMMISSIONS
Property Type Capitalized Costs All Expenditures
- ------------------------- ---------------------------------------- ------------------------------------------
Per Per
Aggregate Square Square Aggregate Square Square
Amount Feet Foot Amount Feet Foot
-------------- ----------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Shopping center &
single-tenant retail
properties $75,406 17,919 $4.21 $80,561 52,022 $1.55
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LEASE RENEWALS
TENANT IMPROVEMENTS
Property Type Capitalized Costs All Expenditures
- ------------------------ --------------------------------------- ------------------------------------------
Per Per
Aggregate Square Square Aggregate Square Square
Amount Feet Foot Amount Feet Foot
------------- ------------ ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Shopping center &
single-tenant retail
properties $ -- -- $ -- $4,855 62,741 $0.08
</TABLE>
12
<PAGE>
Note 5: SEGMENT DISCLOSURE
FASB No. 131 requires disclosure about segments of the Company and related
information.
The Company evaluates performance and makes resource-allocation decisions on an
individual property basis. For financial reporting purposes, the Company has
grouped its properties into three segments: shopping centers; single-tenant
retail; and other commercial properties. Investments principally consist of real
estate, but also include real estate secured loans (three) and a real estate
joint venture (one).
Non-segment revenue consists primarily of interest income pertaining to related
party loans. Non-segment assets include cash, non-tenant accounts receivable and
deferred financing costs.
The accounting policies of the segments are the same as those described in
Note 1 to the Company's annual report on Form 10-K for the year ended
December 31, 1998.
The Company assesses and measures segment operating results based on a
performance measure referred to as Funds From Operations ("FFO"). The National
Association of Real Estate Investment Trusts defines FFO as net income,
calculated in accordance with generally accepted accounting principles (GAAP),
plus depreciation and amortization of assets uniquely significant to the real
estate industry (a) reduced by gains and increased by losses on (i) sales of
property and (ii) extraordinary and unusual items, and (b) after adjustments for
unconsolidated partnerships and joint ventures, so as to reflect FFO on the same
basis. FFO does not represent cash flows from operations as defined by GAAP and
should not be considered a substitute for net income as an indicator of the
Company's operating performance, or for cash flows as a measure of liquidity.
Furthermore, FFO as disclosed by other REITS may not be comparable to the
Company's calculation of FFO.
13
<PAGE>
The revenues and profit (loss), for each of the reportable segments are
summarized as follows for the quarter and nine months ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------- ------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Shopping centers ............................................ $ 12,710 $ 11,310 $ 37,782 $ 33,440
Single tenant retail ........................................ 428 589 1,254 1,757
Commercial and other ........................................ 1,013 1,050 3,342 2,907
Non-segment ................................................. 26 20 148 70
-------- -------- -------- --------
Total revenues ........................................... $ 14,177 $ 12,969 $ 42,526 $ 38,174
======== ======== ======== ========
PROFIT (LOSS):
Funds from operations:
Shopping centers ............................................ $ 10,300 $ 9,290 $ 30,210 $ 27,224
Single tenant retail ........................................ 356 520 1,136 1,664
Commercial and other ........................................ 997 1,035 3,162 2,757
-------- -------- -------- --------
Total segment FFO ........................................ 11,653 10,845 34,508 31,645
Interest income ............................................. 25 19 132 62
Other income ................................................ 2 1 16 9
Interest expense ............................................ (3,500) (3,474) (10,550) (9,747)
Other operating expense ..................................... (1,107) (926) (2,930) (2,693)
Depreciation ................................................ (57) (26) (148) (77)
General and administrative .................................. (712) (587) (2,169) (2,174)
-------- -------- -------- --------
Total FFO (assuming full conversion of all minority
interest Operating Partnership Units)................... 6,304 5,852 18,859 17,025
Plus gains (less loss) on sales of real estate
investments ............................................. 2,313 -- 4,426 (30)
Less depreciation and amortization .......................... (2,986) (3,115) (8,820) (9,238)
Less minority interest ...................................... (401) -- (1,203) --
Less change in accounting principle ......................... -- -- (57) --
-------- -------- -------- --------
Net income .............................................. $ 5,230 $ 2,737 $ 13,205 $ 7,757
======== ======== ======== ========
</TABLE>
14
<PAGE>
The assets for each of the reportable segments are summarized as follows as of
September 30, 1999 and December 31, 1998, respectively:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Shopping centers............................................... $369,488 $374,262
Single tenant retail........................................... 9,723 10,371
Commercial and other........................................... 23,158 28,146
Non-segment.................................................... 13,183 14,112
-------- --------
Total assets................................................ $415,552 $426,891
======== ========
</TABLE>
Note 6: EARNINGS PER SHARE
In February 1997, the FASB issued FASB No. 128, "EARNINGS PER SHARE." The
purpose of this pronouncement is to show the effect of the exercise of certain
options and other convertible securities on earnings per share. A reconciliation
of the denominator used in the calculation of "DILUTED EARNINGS PER SHARE" for
the three and nine months ended September 30, 1999 and 1998 is shown below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------- --------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Weighted average shares outstanding........................ 17,227,916 17,210,772 17,222,911 17,204,382
Plus: Options with exercise prices below period -end
market price of common stock......................... 342 5,771 3,119 19,244
Stock issued under restricted stock plan............. 34,464 32,722 34,464 32,722
OP units convertible into shares of beneficial
interest............................................. 1,432,364 -- -- --
--------- ---------- ---------- ----------
Diluted weighted average shares outstanding................ 18,695,086 17,249,265 17,260,494 17,256,348
========== ========== ========== ==========
</TABLE>
During the three and nine months ended September 30, 1999, the Company had
1,432,364 DownREIT Operating Partnership (OP) Units outstanding in connection
with the Kienow's transaction. These OP Units are reflected in the above
calculation for the three months ended September 30, 1999. Hypothetical
conversion of these OP Units had the effect of increasing earnings per share for
the nine months ended September 30, 1999, and as such, conversion was not
assumed for this period.
15
<PAGE>
The following stock options are not included in the diluted earnings per share
calculation because the options' exercise price was greater than the average
market price of the common shares for the three and nine months ended
September 30, 1999 and, therefore, the effect would be antidilutive:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1999
------------------------------------------------
<S> <C> <C>
Anti-dilutive options.............................................. 908,500 723,500
Range of exercise prices........................................... $11.25 - $14.78 $12.31 - $14.78
</TABLE>
16
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 which reflect management's
current views with respect to future events and financial performance. Such
forward-looking statements are subject to certain risks and uncertainties
including, but not limited to, the effects of future events on the Company's
financial performance; the risk that the Company may be unable to finance its
planned acquisition and development activities; risks related to the retail,
commercial or industrial businesses in which the Company's properties compete,
including the potential adverse impact of external factors such as inflation,
consumer confidence, unemployment rates and consumer tastes and preferences;
risks associated with significant tenants including the potential adverse impact
should a significant tenant experience financial difficulties; risks associated
with the Company's development activities, such as the potential for cost
overruns, delays and lack of predictability with respect to the financial
returns associated with these development activities; the risk of potential
increase in market interest rates from current rates; and risks associated with
real estate ownership, such as the potential adverse impact of environmental
contamination or the impact of changes in the local economic climate on the
revenues and the value of the Company's properties.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flows provided by operations and other sources
available to the Company will continue to provide adequate funds for all current
principal and interest payments as well as dividend payments required to
maintain its status as a real estate investment trust under the Internal Revenue
Code. Cash on hand, proceeds from the sale of properties held for sale and
borrowings under the existing bank line, as well as other debt and equity
alternatives, are expected to provide the necessary funds to achieve future
growth.
The agreements executed in connection with the Company's senior notes and its
bank line contain certain covenants (including minimum shareholders' equity,
maximum ratio of debt to net worth and income coverage requirements) which
impose certain limitations on the incurrence of additional debt and other
restrictions on the Company.
As of September 30, 1999, the Company's aggregate outstanding indebtedness of
$211,824,000 consisted of $134,674,000 in fixed rate, long-term debt and
$77,150,000 of borrowings under the Company's variable rate, unsecured bank
line.
As of September 30, 1999, the Company had $19.6 million available under its $100
million bank line. The availability on the $100 million bank line is net of a
$3.3 million outstanding letter of credit which is related to the Company's
investment in the Walnut Creek development. The Company intends to replace or
renew the bank line before it expires on September 30, 2001.
17
<PAGE>
COMMITMENTS AND CONTINGENCIES
In connection with the redevelopment of a property located in Walnut Creek,
California, the Company committed to fund $26.5 million on a note secured by a
first deed of trust on the property under development. At September 30, 1999,
the Company had funded a total of $7.6 million relating to this investment and
is considering increasing its funding commitment to $42 million.
As of September 30, 1999, the Company had commitments under several new and
renewal leases which will result in expenditures of approximately $900,000 in
real estate improvements and leasing commissions.
FUNDS FROM OPERATIONS
Industry analysts and the Company consider Funds from Operations (FFO) to be an
alternate measure of an equity REIT's performance since such measure does not
recognize depreciation and amortization of real estate assets as reductions of
income from operations. Historical cost accounting for real estate assets
implicitly assumes that the value of real estate assets diminishes predictably
over time. Yet, since real estate values have historically risen or fallen with
market conditions, the Company, along with most industry investors, considers
presentation of operating results for real estate companies that use historical
cost accounting to be less than fully informative.
The National Association of Real Estate Investment Trusts (NAREIT) defines Funds
From Operations as net income calculated in accordance with generally accepted
accounting principles (GAAP), plus depreciation and amortization of assets
uniquely significant to the real estate industry (a) reduced by gains and
increased by losses on (i) sales of property, and (ii) extraordinary and unusual
items, and (b) after adjustments for unconsolidated partnerships and joint
ventures, so as to reflect FFO on the same basis. FFO does not represent cash
flows from operations as defined by GAAP and should not be considered a
substitute for net income as an indicator of the Company's operating
performance, or for cash flows as a measure of liquidity. Furthermore, FFO as
disclosed by other REITS may not be comparable to the Company's calculation of
FFO.
18
<PAGE>
The table below provides a reconciliation of net income in accordance with GAAP
to FFO, as calculated in accordance with NAREIT's guidelines, for the three and
nine months ended September 30, 1999 and 1998, assuming full conversion of all
minority interest (operating partnership units):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------- -----------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income ......................................................... $ 5,230 $ 2,737 $ 13,205 $ 7,757
Less: Gains on sales of real estate investments .................... (2,313) -- (4,426) --
Plus: Loss on sale of real estate investments ...................... -- -- 30
Real property depreciation ................................ 2,560 2,729 7,745 8,113
Real property depreciation
unconsolidated real estate ............................ 84 -- 84 --
Amortization of tenant
improvement costs ..................................... 247 294 728 855
Amortization of leasing-related costs ..................... 95 92 263 269
Minority interest ......................................... 401 -- 1,203 --
Cumulative effect of change in accounting principle ....... -- -- 57 --
-------- -------- -------- --------
Funds From Operations .............................................. $ 6,304 $ 5,852 $ 18,859 $ 17,024
======== ======== ======== ========
</TABLE>
19
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
Net income increased $2,493,000 to $5,230,000 for the quarter ended September
30, 1999 from $2,737,000 for the comparable quarter in 1998. On a per share
basis (calculated using diluted weighted average shares outstanding), net income
increased $0.14 to $0.30 for the quarter ended September 30, 1999 from $0.16 for
the comparable quarter in 1998. This increase in net income is principally due
to gains of $2,313,000 realized from the sale of two properties. Other factors
contributing to the increase include increased minimum rents, percentage rents,
recoveries from tenants, income from unconsolidated real estate subsidiary,
partially offset by increased property and other operating expenses and minority
interest.
- Minimum rents increased $357,000 to $10,939,000 for the quarter
ended September 30, 1999 from $10,582,000 in the comparable 1998
quarter.
- Percentage rents increased $299,000 to $344,000 for the quarter
ended September 30, 1999 from $45,000 in the comparable 1998
quarter.
- Recoveries from tenants increased $350,000 to $2,092,000 for the
quarter ended September 30, 1999 from $1,742,000 in the comparable
1998 quarter.
- Property operating costs increased $357,000 to $2,251,000 for the
quarter ended September 30, 1999 from $1,894,000 in the comparable
1998 quarter.
The above increases are principally due to the 1998 investments (which consist
of the shopping center acquisition in Blaine, Washington and the master
leasehold interest in the shopping center in Dublin, California), partially
offset by nine dispositions. Additionally, the increase in minimum rents can be
partially attributed to the lease-up of the Petaluma, California property.
Income from the Company's unconsolidated real estate subsidiary was $113,000 and
minority interest was $401,000 for the quarter ended September 30, 1999. There
was no comparable income or minority interest for the quarter ended September
30, 1998. The income from unconsolidated real estate subsidiary relates to the
Company's acquisition of Kienow's during the fourth quarter of 1998. The
minority interest represents the income allocation to the holders of OP Units in
the Western/Kienow's L.P. DownREIT.
Other operating expenses increased $301,000 to $1,437,000 for the quarter ended
September 30, 1999 from the comparable 1998 period amount of $1,136,000. This
increase is due to various increased costs including costs incurred pursuing
real estate investments which were expensed.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net income increased $5,448,000 to $13,205,000 for the nine months ended
September 30, 1999 from $7,757,000 for the comparable nine month period in 1998.
On a per share basis (calculated using diluted weighted average shares
outstanding), net income increased $0.32 to $0.77 for the nine months ended
September 30, 1999 from $0.45 for the comparable nine month period in 1998. This
increase in net income is principally due to gains of $4,426,000 realized from
the sale of five properties. Other factors contributing to the increase include
increased minimum rents, percentage rents, recoveries from tenants, interest
income, income from unconsolidated real estate subsidiary,
20
<PAGE>
partially offset by increased interest expense, property and other operating
expenses and minority interest.
- Minimum rents increased $1,941,000 to $33,039,000 for the nine
months ended September 30, 1999 from $31,098,000 in the comparable
1998 nine months.
- Percentage rents increased $229,000 to $718,000 for the nine
months ended September 30, 1999 from $489,000 in the comparable
1998 nine months.
- Recoveries from tenants increased $1,007,000 to $6,521,000 for the
nine months ended September 30, 1999 from $5,514,000 in the
comparable 1998 nine months.
- Property operating costs increased $1,018,000 to $7,012,000 for
the nine months ended September 30, 1999 from $5,994,000 in the
comparable 1998 nine months.
The above increases are principally due to the 1998 investments (which consist
of the shopping center acquisition in Blaine, Washington, and the master
leasehold interest in the shopping center in Dublin), partially offset by
property dispositions. Additionally, the increase in minimum rents can be
partially attributed to the lease-up of the Petaluma property.
Interest income increased $768,000 to $1,296,000 for the nine months ended
September 30, 1999 from the comparable 1998 period amount of $528,000. This
increase results primarily from the two mortgage notes receivable the Company
originated during 1998.
Income from the Company's unconsolidated real estate subsidiary was $258,000 and
minority interest was $1,203,000 for the nine months ended September 30, 1999.
There was no comparable income or minority interest for the nine months ended
September 30, 1998. The income from unconsolidated real estate subsidiary
relates to the Company's acquisition of Kienow's during the fourth quarter of
1998. The minority interest represents the income allocation to the holders of
Operating Partnership Units in the Western/Kienow's L.P. DownREIT.
Interest expense increased $803,000 to $10,550,000 for the nine months ended
September 30, 1999 from the comparable 1998 period amount of $9,747,000. This is
primarily due to the increase in the outstanding balance under the bank line as
a result of funding the fourth quarter 1998 real estate investments.
Other operating expenses increased $714,000 to $3,872,000 for the nine months
ended September 30, 1999 from the comparable 1998 period amount of $3,158,000.
This increase is primarily due to the master lease payments on the Dublin
property the Company entered into during the third quarter of 1998.
21
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<S><C>
Item 1 - 5 None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
(3) Declaration of Trust, as amended (filed as Exhibit
3 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 quarter ended December
31, 1997, and incorporated herein by reference).
22
<PAGE>
(10.3)** Management Contracts (filed as Exhibit 10.4 to
Registrant's 10-Q for the quarter ended March 31,
1998, and incorporated herein by reference).
(10.4)** Company's 1998 Equity Incentive Plan (filed as
Exhibit 10.4 to Registrant's 10-Q for the quarter
ended June 30, 1998, and incorporated herein by
reference).
(10.5)** Stock Purchase and Contribution Agreement dated
September 29, 1998 (filed as Exhibit 10.5 to
Registrant's 10-Q for the quarter ended September
30, 1998, and incorporated herein by reference).
(10.6) Agreement of Limited Partnership of
Western/Kienow's, L.P. dated October 30, 1998
(filed as Exhibit 10.6 to Registrant's 10-Q for
the quarter ended September 30, 1998, and
incorporated herein by reference).
(10.7)**+ Management Contracts
(27)+ Financial Data Schedule
(b) Reports on Form 8-K
On August 19, 1999, a report on Form 8-K was filed
to report that the Company had changed its name
from Western Investment Real Estate Trust to
Western Properties Trust, pursuant to authority
granted the Board of Trustees under the Company's
Declaration of Trust.
- -------------------------------------------------------------------------------
+ Filed with this report
** Management contract or compensatory plan or arrangement.
</TABLE>
23
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN PROPERTIES TRUST
(Registrant)
By: /s/Dennis D. Ryan
------------------------------
Dennis D. Ryan
Executive Vice President,
Chief Financial Officer
and Trustee
Dated: November 11, 1999
-----------------
24
<PAGE>
AGREEMENT
This Agreement is made and is effective the 4th day of August, 1999,
between WESTERN INVESTMENT REAL ESTATE TRUST ("Company") and BRADLEY N. BLAKE
("Executive").
The parties desire to amend certain provisions in an employment
agreement between the parties dated January 28, 1998.
The "Change of Control" section shall be amended to read as follows:
Change of Control: As of the date of the Change of Control,
any remaining balance on the stock
purchase loan will be forgiven and all
options, restricted stock and other stock
subject to vesting will vest 100%.
If, in anticipation of, or during the
12-month period following a Change of
Control, the Executive is terminated other
than for cause or resigns for "Good Reason"
(as defined below) then there shall be a
severance package to include a lump sum cash
payment equal to two (2) times the current
base annual salary and the highest cash
bonus paid during the prior two calendar
years (lump sum payment not to be less than
$800,000);
"Good Reason" is defined as any of the
following events:
A reduction in the Executive's base
annual salary, bonus opportunity or
a material reduction in benefits.
The Executive is assigned duties
inconsistent with the Executive's
position, authority, duties or
responsibilities as they existed
prior to the Change of Control.
The Executive's primary office is
relocated more than 35 miles from
its location immediately prior to
the Change of Control or the
Executive is required to travel on
company business to a substantially
greater extent than required
immediately prior to the Change of
Control.
Anything in this Agreement to the contrary
notwithstanding, a resignation by the
Executive for any reason during the 30-day
period immediately following the first
anniversary of the Change of Control shall
be deemed to be a resignation for "Good
Reason" for all purposes of this agreement.
All other terms and conditions set forth in the Agreement dated
January 28, 1998 shall remain in full force and effect.
WESTERN INVESTMENT REAL ESTATE TRUST
By: _________________________________
- --------------------------
BRADLEY N. BLAKE
By:__________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S STATEMENT OF INCOME FOR THE MONTH ENDED SEPTEMBER 30, 1999 AND THE
BALANCE SHEET AT SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 458
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 403,170
<DEPRECIATION> 87,355
<TOTAL-ASSETS> 415,552
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 211,824
0
0
<COMMON> 242,200
<OTHER-SE> (63,414)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 415,552
<SALES> 0
<TOTAL-REVENUES> 42,526
<CGS> 0
<TOTAL-COSTS> 10,884<F4>
<OTHER-EXPENSES> 11,110<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,550
<INCOME-PRETAX> 13,205
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,205
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.77
<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 (7,012) and
other Operating Expenses (3,872).
<F5>Amount comprised of Depreciation Expense (8,884) and
General and Administrative Expense (2,226).
</FN>
</TABLE>
