<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-08723
WESTERN INVESTMENT REAL ESTATE TRUST
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-6100058
- --------------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 POWELL ST., STE. 600, EMERYVILLE, CA 94608
- --------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 597-0160
-------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares of Beneficial Interest, No Par Value - 17,222,814 shares as of
May 10, 1999
1
<PAGE>
WESTERN INVESTMENT REAL ESTATE 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 - March 31, 1999, and December 31, 1998 4
Consolidated Statements of Income - Three months ended March 31, 1999,
and 1998 5
Consolidated Statements of Shareholders' Equity - Three months ended
March 31, 1999, and year ended December 31, 1998 6
Consolidated Statements of Cash Flows - Three months ended
March 31, 1999, and 1998 7
Notes to Consolidated Financial Statements 8-15
Item 2. Management's Discussion and Analysis of Financial 16-18
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19-20
SIGNATURE 21
</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 disclosure normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules.
Interim results are not necessarily indicative of results for a full year.
The interim financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented 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.
3
<PAGE>
CONSOLIDATED BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, December 31,
ASSETS 1999 1998
------------------------- -----------------------
(In thousands, except share data)
<S> <C> <C>
Real estate investments:
Real estate properties....................................................... $410,573 $410,183
Less accumulated depreciation and amortization............................... (85,479) (82,660)
----------- -----------
325,094 327,523
Real estate properties held for sale......................................... 30,309 30,288
Less accumulated depreciation and amortization............................... (7,452) (7,452)
------------ ------------
22,857 22,836
Unconsolidated real estate subsidiary........................................ 43,664 43,854
Mortgage notes receivable.................................................... 16,537 16,160
----------- -----------
Net real estate investments............................................... 408,152 410,373
Cash and cash equivalents....................................................... 1,469 1,512
Accounts receivable and other assets............................................ 13,813 13,704
Deferred long-term debt issuance costs, net..................................... 1,219 1,302
----------- -----------
$424,653 $426,891
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank line of credit............................................................. $ 87,400 $ 85,700
Senior notes, net............................................................... 124,801 124,794
Mortgage payable................................................................ 9,960 10,009
----------- ----------
222,161 220,503
Interest payable................................................................ 1,307 3,670
Prepaid rents and security deposits............................................. 2,201 2,161
Other liabilities............................................................... 3,669 3,517
----------- -----------
Total liabilities............................................................ 229,338 229,851
----------- -----------
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: March 31, 1999 - 17,221,107 shares...............
December 31, 1998 - 17,216,550 shares............ 242,029 241,741
Accumulated dividends in excess of net income................................ (64,130) (62,117)
----------- -----------
Total shareholders' equity................................................... 177,899 179,624
----------- -----------
$424,653 $426,891
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
-----------------------------------------
(In thousands,
except share and per share data)
<S> <C> <C>
REVENUES:
Minimum rents.................................................. $ 11,068 $ 10,050
Percentage rents............................................... 237 214
Recoveries from tenants........................................ 1,780 1,448
Interest income................................................ 442 64
Other income................................................... 126 96
---------- ----------
Total revenues...................................................... 13,653 11,872
---------- ----------
EXPENSES:
Interest....................................................... 3,534 2,949
Property operating costs....................................... 1,914 1,571
Depreciation and amortization.................................. 2,948 3,047
Other operating expenses....................................... 1,142 995
General and administrative..................................... 891 919
---------- ----------
Total expenses...................................................... 10,429 9,481
---------- ----------
Income before minority interest................................ 3,224 2,391
Minority interest................................................... 403 --
---------- ----------
Net income.......................................................... $ 2,821 $ 2,391
---------- ----------
---------- ----------
Basic net income per share:......................................... $ 0.16 $ 0.14
---------- ----------
---------- ----------
Diluted net income per share:....................................... $ 0.15 $ 0.14
---------- ----------
---------- ----------
Cash dividends paid................................................. $ 0.28 $ 0.28
---------- ----------
---------- ----------
Weighted average number of shares outstanding--Basic......... 17,217,894 17,194,402
---------- ----------
---------- ----------
Weighted average number of shares outstanding--Diluted....... 18,696,046 17,266,092
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST
- -------------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended March 31, 1999,
and Year Ended December 31, 1998
(in thousands, except share data)
Accumulated
Dividends Total
Shares of in Excess of Share-
Beneficial Interest Net Holders'
Number Amount Income Equity
------------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998.......................... 17,191,860 $242,682 $ (56,433) $186,249
Net proceeds from issuance of shares.............. 12,453 182 -- 182
Shares issued under restricted stock plan......... 12,237 176 -- 176
Loans to officers................................. -- (1,299) -- (1,299)
Net income........................................ -- -- 13,616 13,616
Cash dividends and distributions.................. -- -- (19,300) (19,300)
----------------- -------------- ------------ -----------
Balance, December 31, 1998........................ 17,216,550 241,741 (62,117) 179,624
Shares issued under restricted stock plan......... 4,557 28 -- 28
Forgiveness of loans to officers.................. -- 260 -- 260
Net income........................................ -- -- 2,821 2,821
Cash dividends and distributions.................. -- -- (4,834) (4,834)
----------------- -------------- ----------- ----------
BALANCE, MARCH 31, 1999........................... 17,221,107 $242,029 $ (64,130) $177,899
----------------- -------------- ----------- ----------
----------------- -------------- ----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS WESTERN INVESTMENT REAL ESTATE TRUST
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
-----------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 2,821 $ 2,391
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest............................................................ 403 --
Depreciation and amortization................................................ 2,948 3,047
Amortization of deferred debt issuance costs................................. 111 81
Earned compensation on restricted stock plan................................. 28
Increase in accounts receivable and other assets............................. (75) (691)
Increase in deferred rent receivable......................................... (129) (27)
Decrease in interest payable................................................. (2,363) (2,027)
Increase in prepaid rents and security deposits
and other liabilities.................................................... 192 1,287
Loan forgiveness............................................................. 260 --
----------- ----------
Net cash provided by operating activities.................................... 4,196 4,061
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage note receivable............................................. (377) --
Acquisition of real estate investments............................................ -- (28,254)
Investment in unconsolidated real estate subsidiary................................ 190 --
Funds released from escrow......................................................... -- 7,117
Improvements of real estate investments:
Build-to-suit developments................................................... -- (108)
New leases................................................................... (376) (337)
General...................................................................... (121) (226)
Recovery of investment in direct financing leases.................................. 52 92
----------- ----------
Net cash used in investing activities........................................ (632) (21,716)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank line of credit.................................................... 14,300 31,300
Principal payments on bank line of credit.......................................... (12,600) (8,800)
Principal payments on mortgage note payable........................................ (49) (15)
Loans to officers.................................................................. -- (799)
Net proceeds from issuance of shares............................................... -- 182
Deferred long term issuance costs.................................................. (21) (20)
Cash distributions to minority interest............................................ (403) --
Cash dividends paid................................................................ (4,834) (4,814)
----------- ----------
Net cash (used in) provided by financing activities......................... (3,607) 17,034
----------- ----------
Net decrease in cash and cash equivalents.................................... (43) (621)
Cash and cash equivalents, at the beginning of period............................. 1,512 1,463
----------- ----------
Cash and cash equivalents, at the end of period.................................... $ 1,469 $ 842
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................... $ 6,169 $ 4,913
----------- ----------
----------- ----------
NON CASH FINANCING ACTIVITIES:
Real estate acquisition debt....................................................... $ -- $ 10,266
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
WESTERN INVESTMENT REAL ESTATE TRUST
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
Note A: ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING
PRONOUNCEMENTS
(A) DESCRIPTION OF ORGANIZATION
Founded in 1962, Western Investment Real Estate Trust ("Western") and its
affiliates own and operate community and neighborhood shopping centers
located in the western United States. The corporate office of the
self-administered equity real estate investment trust is in the San Francisco
Bay Area city of Emeryville, California. Its shares are traded on the
American Stock Exchange under the symbol "WIR".
The accompanying consolidated financial statements include the accounts of
Western, Western/Kienow's L.P. and a joint venture in which Western has a
controlling financial interest (collectively, the Company). Western is the
sole general partner in Western/Kienow's L.P. At March 31, 1999, the
Company's real estate portfolio was comprised of 66 properties, 55 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 the 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 3 months ended March 31, 1999.
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 year 2000, the
effective date for the Company of FASB 133. Management believes that the
adoption of this Statement will not have a material impact on the Company's
financial statements.
8
<PAGE>
Note B: REAL ESTATE INVESTMENTS
At March 31, 1999, the Company had investments in 66 properties, totaling 5.7
million leasable square feet. Included in this total are nine properties,
which were held for sale and total 355,000 leasable square feet.
Occupancy percentages for the Company's portfolios is as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 March 31, 1998
-------------- ----------------- --------------
<S> <C> <C>
Shopping centers 92.7% 92.5% 92.1%
Single-tenant retail 65.5%(1) 100.0% 100.0%
Commercial and other 96.1% 96.1% 96.0%
Overall occupancy 91.3% 93.1% 92.9%
</TABLE>
Occupancy percentage is based on square footage leased as a percent of total
leasable square feet.
(1) 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.
The 10 Portland, Oregon retail properties that are held through an
unconsolidated subsidiary are not included in the above occupancy
percentages. These properties are undergoing extensive retenanting and
redevelopment.
During the quarter ended March 31, 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.
9
<PAGE>
Note C: CAPITAL EXPENDITURES
It is the Company's practice to capitalize certain 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 months ended March
31, 1999, and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
---------------------
(In thousands)
<S> <C> <C>
"Build to Suit" capital improvements..................... $ -- $ 108
Capitalized costs incurred in connection with
leasing previously UNLEASED space.................. 11 32
Capitalized costs incurred in connection with
leasing previously LEASED space..................... 365 305
Capitalized costs which relate to
improvements to common areas 121 226
----- -----
Total Capitalized expenditures........................... $ 497 $ 671
----- -----
----- -----
Improvements............................................. $ 463 $ 507
Leasing-related costs.................................... 34 164
----- -----
Total capitalized expenditures........................... $ 497 $ 671
----- -----
----- -----
</TABLE>
As of March 31, 1999, the Company had commitments under several new leases
which will result in expenditures of approximately $1.3 million in real
estate improvements and leasing commissions.
10
<PAGE>
During the three months ended March 31, 1999, the Company entered into leases
that obligate the Company to fund certain leasing commissions and property
improvements. These obligations relate to both new leases and lease renewals,
a portion of these obligations were paid and capitalized during the quarter
ended March 31, 1999, and is reflected in the preceding table.
The aggregate and per-square-foot information representing capitalized
expenditures associated with leasing 31,745 square feet of new leases and
53,227 square feet of renewal leases the Company executed during the
quarter is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
New Leases
----------
Tenant Leasing
Property Type Improvements Commissions
- ------------- ------------------------------ --------------------
Per Per Per Per
Aggregate Square Square Aggregate Square Square
Amount Foot(1) Foot(2) Amount Foot(1) Foot(2)
--------- -------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shopping centers &
single-tenant
retail properties $597,028 $24.62 $18.81 $ 28,052 $1.94 $0.88
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Lease Renewals
---------------
Tenant Leasing
Property Type Improvements Commissions
- ------------- ------------------------------- ----------------------------------
Per Per Per Per
Aggregate Square Square Aggregate Square Square
Amount Foot(1) Foot(2) Amount Foot(1) Foot(2)
--------- -------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shopping centers &
single-tenant
retail properties $173,000 $21.11 $ 3.25 $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average per square foot for only those leases where the Company
incurred an obligation to pay tenant improvement or leasing
commissions.
(2) Average per square foot for all leases executed during the quarter.
11
<PAGE>
Note D: LOANS TO OFFICERS
Because of the fulfillment of certain Company and individual goals, during
February 1999, the Board of Trustees forgave $260,000 of loans granted to
officers during 1998. The 1998 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
interest with those of the shareholders.
Note E: SEGMENT DISCLOSURE
FASB No. 131 requires disclosure about segments of the Company and related
information.
The Company evaluates performance and makes resource-allocation decisions on
an individual property basis. For financial reporting purposes, the Company
has grouped its properties into three segments: shopping centers,
single-tenant retail and other commercial properties. Investments principally
consist of real estate, but also include real estate secured loans (three)
and a real estate joint venture (one).
Non-segment revenue consists mainly of interest income. Non-segment assets
include cash, accounts receivable and deferred financing costs.
The accounting policies of the segments are the same as those described in
Note 1 to the Company's 10-K.
The Company assesses and measures segment operating results based on a
performance measure referred to as Funds From Operations ("FFO"). The
National Association of Real Estate Investment Trusts defines FFO as net
income, calculated in accordance with generally accepted accounting
principles (GAAP), plus depreciation and amortization of assets uniquely
significant to the real estate industry (a) reduced by gains and increased by
losses on (i) sales of property and (ii) extraordinary and unusual items and
(b) after adjustments for unconsolidated partnerships and joint ventures, so
as to reflect FFO on the same basis. FFO does not represent cash flows from
operations as defined by GAAP and should not be considered a substitute for
net income as an indicator of the Company's operating performance, or for
cash flows as a measure of liquidity. Furthermore, FFO as disclosed by other
REITs may not be comparable to the Company's calculation of FFO.
12
<PAGE>
The revenues and profit (loss), for each of the reportable segments are
summarized as follows for the quarter ended March 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
1999 1998
------- -------
<S> <C> <C>
REVENUES
Shopping centers.......................... $11,950 $10,385
Single-tenant retail...................... 455 604
Commercial and other...................... 1,159 816
Non-segment............................... 89 67
------- -------
Total revenue........................... $13,653 $11,872
------- -------
------- -------
PROFIT (LOSS)
Funds from operations
Shopping centers........................ $ 9,630 $ 8,686
Single-tenant retail.................... 417 580
Commercial and other.................... 1,165 814
------- -------
Total segment contribution to FFO..... 11,212 10,080
Interest income......................... 80 61
Other income............................ 2 6
Interest expense........................ (3,340) (2,937)
Other operating expenses................ (891) (853)
Personal property depreciation.......... (43) (24)
General and administrative.............. (833) (919)
------- -------
Consolidated FFO...................... 6,187 5,414
Depreciation and amortization........... (2,906) (3,023)
Minority interest....................... (403) --
Change in accounting principle.......... (57) --
------- -------
Net income................................ $ 2,821 $ 2,391
------- -------
------- -------
</TABLE>
13
<PAGE>
The assets for each of the reportable segments are summarized as follows as
of March 31, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
ASSETS
Shopping centers.............................. $365,510 $364,879
Single-tenant retail.......................... 24,438 20,352
Commercial and other.......................... 29,088 25,627
Non-segment................................... 5,617 16,033
--------- -----------
Total assets................................ $424,653 $426,891
</TABLE>
14
<PAGE>
Note F: SUBSEQUENT EVENTS
During April 1999, the Company sold three of its commercial properties
located in Salinas, Milpitas and Cupertino, California, for $10.9 million
which exceeded the depreciated value of these properties. The Company used
the proceeds to paydown its bank line of credit.
15
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS
The discussions in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain certain forward looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 which reflect management's current views with respect to future
events and financial performance. Such forward-looking statements are subject
to certain risks and uncertainties including, but not limited to, the effects
of future events on the Company's financial performance; the risk that the
Company may be unable to finance its planned acquisition and development
activities; risks related to the retail, commercial or industrial businesses
in which the Company's properties compete, including the potential adverse
impact of external factors such as inflation, consumer confidence,
unemployment rates and consumer tastes and preferences; risks associated with
significant tenants including the potential adverse impact should the
significant tenant experience financial difficulties; risks associated with
the Company's development activities, such as the potential for cost
overruns, delays and lack of predictability with respect to the financial
returns associated with these development activities; the risk of potential
increase in market interest rates from current rates; and risk associated
with real estate ownership, such as the potential adverse impact of
environmental contamination or changes in the local economic climate on the
revenues and the value of the Company's properties.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flows provided by operations and other
sources available to the Company will continue to provide adequate funds for
all current principal and interest payments as well as dividend payments
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 of credit, as well
as other debt and equity alternatives, are expected to provide the necessary
funds to achieve future growth.
The Company's agreements executed in connection with the Company's senior
notes and its bank line of credit contain certain covenants (including
minimum shareholders' equity, maximum ratio of debt to net worth and income
coverage requirements) which impose certain limitations on the incurrence of
additional debt and other restrictions on the Company.
As of March 31, 1999, the Company's aggregate outstanding indebtedness of
$222,161,000 consisted of $134,761,000 in fixed rate, long-term debt and
$87,400,000 of borrowings under the Company's variable rate, unsecured bank
line.
As of March 31, 1999, the Company had $9.3 million available under its $100
million bank line of credit. The availability on the $100 million bank line
is reduced by a $3.3 million outstanding letter of credit which is related to
the Company's investment in the Walnut Creek development. The bank line of
credit expires September 30, 2001, at which time the Company intends to
replace or renew it.
16
<PAGE>
COMMITMENTS AND CONTINGENCIES
In connection with the redevelopment of a property located in Walnut Creek,
California, the Company was committed to fund an additional $15.1 million on
a note secured by a first deed of trust on the property under development. At
March 31, 1999, the Company had funded $7.1 million of the $22.2 million
obligation.
As of March 31, 1999, the Company had commitments under several new leases
which will result in expenditures of approximately $1.3 million in real
estate improvements and leasing commissions.
FUNDS FROM OPERATIONS
Industry analysts and the Company consider Funds from Operations (FFO) to be
an alternate measure of an equity REIT's performance since such measure does
not recognize depreciation and amortization of real estate assets as
reductions of income from operations. Historical cost accounting for real
estate assets implicitly assumes that the value of real estate assets
diminishes predictably over time. Yet, since real estate values have
historically risen or fallen with market conditions, the Company, along with
most industry investors, considers presentation of operating results for real
estate companies that use historical cost accounting to be less than fully
informative.
The National Association of Real Estate Investment Trusts (NAREIT) defines
Funds From Operations as net income calculated in accordance with generally
accepted accounting principles (GAAP), plus depreciation and amortization of
assets uniquely significant to the real estate industry, reduced by gains and
increased by losses on (i) sales of property. and (ii) non-recurring items.
FFO does not represent cash flows from operations as defined by GAAP and
should not be considered a substitute for net income as an indicator of the
Company's operating performance, or for cash flows as a measure of liquidity.
Furthermore, FFO as disclosed by other REIT's may not be comparable to the
Company's presentation of FFO.
The table below provides a reconciliation of net income in accordance with
GAAP to FFO as calculated in accordance with NAREIT's guidelines, for the
three months ended March 31, 1999 and 1998, assuming full conversion of all
minority interest (operating partnership units):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
-------------------------
(In thousands)
<S> <C> <C>
Net Income................................................................ $ 2,821 $ 2,391
Plus: Real property depreciation....................................... 2,591 2,669
Amortization of tenant
improvement costs............................................ 230 262
Amortization of leasing-related costs............................ 85 92
Minority interest................................................ 403 --
Cumulative effect of change in accounting principle.............. 57 --
------- -------
Funds From Operations..................................................... $ 6,187 $ 5,414
------- -------
------- -------
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income increased $430,000 to $2,821,000 for the quarter ended March 31,
1999, an 18% increase from $2,391,000 for the comparable period in 1998. On a
per share basis (calculated using diluted weighted average shares
outstanding), net income increased from $0.14 in 1998 to $0.15 in 1999.
The major components of this increase were increased minimum rent, recoveries
from tenants and interest income, offset by the minority interest in addition
to increased interest, property operating costs and other operating expenses.
Minimum rents increased $1,018,000 from $10,050,000 in the first quarter of
1998 to $11,068,000 in the comparable period in 1999. Recoveries from tenants
increased $332,000 from $1,448,000 in the first quarter of 1998 to $1,780,000
for the three months ended March 31, 1999. Property operating costs increased
$343,000 from $1,571,000 for the three month period ending March 31, 1998 to
$1,914,000 for the 1999 comparable three month period. These increases are
principally due to 1998 acquisitions.
Minority interest increased $403,000 in the first quarter of 1999 as compared
with the similar quarter in 1998. This increase represents the income
allocation to the holders of operating Partnership units.
Interest expense increased $585,000 from $2,949,000 in the first quarter of
1998 to $3,534,000 for the comparable period in 1999 due to the increase in
the outstanding balance under the bank line of credit as a result of funding
the 1998 new investments.
Interest income increased $378,000 from $64,000 for the first quarter in 1998
to $442,000 for the first quarter in 1999. This increase is due primarily to
the two mortgage notes receivable the Company funded during 1998.
Other operating expenses increased $147,000 from $995,000 in the first
quarter of 1998 to $1,142,000 in the comparable period in 1999. This increase
is primarily due to the master lease payments on the Dublin shopping center
investment.
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.
18
<PAGE>
PART II. OTHER INFORMATION
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).
(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).
19
<PAGE>
(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, 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).
(27)* Financial Data Schedule
- --------------------------------------------------------------------------------
* Filed with this report
** Management contract or compensatory plan or arrangement.
20
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN INVESTMENT REAL ESTATE TRUST
------------------------------------
(Registrant)
By: s/Dennis D. Ryan
------------------------------
Dennis D. Ryan
Executive Vice President,
Chief Financial Officer
and Trustee
Dated: May 10, 1999
----------------
21
<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 MARCH 31, 1999 AND THE
BALANCE SHEET AT MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1469
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 410573
<DEPRECIATION> 85479
<TOTAL-ASSETS> 424653
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 221161
0
0
<COMMON> 242029
<OTHER-SE> (64130)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 424653
<SALES> 0
<TOTAL-REVENUES> 13653
<CGS> 0
<TOTAL-COSTS> 3056<F4>
<OTHER-EXPENSES> 3839<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3534
<INCOME-PRETAX> 2821
<INCOME-TAX> 0
<INCOME-CONTINUING> 2821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2821
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
<FN>
<F1>Amount insignificant.
<F2>Balance Sheet is not classified.
<F3>Amount represents accumulated didvidends in excess of net income.
<F4>Amount comprised of Property Operating Costs (1,914) and Other Operating
Expenses (1,142).
<F5>Amount comprised of Depreciation expense (2,948) and General and Administrative
expense (891).
</FN>
</TABLE>
