FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1996
Commission File Number 0-25230
FIRST WASHINGTON REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1879972
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
4350 East-West Highway, Suite 400, Bethesda, MD 20814
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (301) 907-7800
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
$.01 par value, outstanding as of November 13, 1996:
3,291,245 Shares of Common Stock
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC.
FORM 10-Q
INDEX
Part I: Financial Information Page
Item 1. Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 1
Consolidated Statements of Operations (unaudited)
for the three months and nine months ended
September 30, 1996 and 1995 2
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 23
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share data)
-----------
<TABLE>
<CAPTION>
Sept. 30, December 31,
1996 1995
(unaudited)
ASSETS
<S> <C> <C>
Rental properties:
Land $ 56,511 $ 42,420
Buildings and improvements 229,263 185,672
--------- ---------
285,774 228,092
Accumulated depreciation (28,324) (22,775)
--------- ---------
Rental properties, net 257,450 205,317
Cash and equivalents 1,870 7,806
Tenant receivables, net 4,692 3,214
Deferred financing costs, net 4,717 5,690
Other assets 6,240 5,378
---------- ----------
Total assets $274,969 $227,405
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $162,346 $116,182
Debentures 25,000 25,000
Accounts payable and accrued expenses 5,215 4,059
---------- ----------
Total liabilities 192,561 145,241
Minority interest 12,573 11,088
Stockholders' equity:
Convertible preferred stock $.01 par value,
3,750,000 shares designated; 2,314,189 issued
and outstanding 23 23
Common stock $.01 par value, 90,000,000 shares
authorized; 3,291,245 and 3,189,549 shares
issued and outstanding, respectively 32 32
Additional paid-in capital 86,538 80,699
Accumulated distributions in excess of
earnings (16,758) (9,678)
---------- ----------
Total stockholders' equity 69,835 71,076
--------- ---------
Total liabilities and stockholders'
equity $274,969 $227,405
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
(unaudited)
-------
<TABLE>
<CAPTION>
For three months ended For nine months ended
Sept. 30, Sept. 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Minimum rents $8,390 $6,152 $23,408 $16,597
Percentage rents 107 121 501 302
Tenant reimbursements 1,742 1,175 5,015 3,106
Other income 275 256 1,189 787
-------- -------- ------- -------
Total revenues 10,514 7,704 30,113 20,792
------- ------- ------ ------
Expenses:
Property operating and
maintenance 2,631 1,787 7,623 5,024
General and administrative 648 1,737 2,348 2,152
Interest 3,999 2,845 11,025 8,095
Depreciation and amortization 2,039 1,533 5,783 4,162
------- ------- ------- -------
Total expenses 9,317 7,902 26,779 19,433
------- ------- ------- ------
Income (loss) before income from
Management Company, 1,197 (198) 3,334 1,359
minority interest and
distributions to Preferred
Stockholders
Income from Management Company 90 87 97 361
-------- ------- --------- ------
Income (loss) before minority interest
and distributions to Preferred
Stockholders 1,287 (111) 3,431 1,720
(Income) loss allocated to minority
interest (188) (218) (486) (87)
-------- --------- -------- -------
Income before distributions to
Preferred Stockholders 1,099 (329) 2,945 1,633
Distributions to Preferred
Stockholders (1,410) (1,388) (4,231) (3,728)
------- ------- ------- -------
Net loss allocated to common
stockholders ($311)$(1,717) ($1,286) ($2,095)
======== ======= ======== ========
Net loss per Common Share ($0.09) ($0.56) ($0.40) ($1.01)
======== ======== ======== ========
Shares of Common Stock, in thousands 3,288 3,076 3,227 2,081
======== ======= ======== ========
Distributions per share $0.4875 $0.4875 $1.4625 $1.4625
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
--------
<TABLE>
<CAPTION>
For the nine months ended
Sept. 30,
1996 1995
<S> <C> <C>
Operating activities:
Income before distributions to
Preferred Stockholders $2,945 $1,633
Adjustment to reconcile net cash
provided by operating activities:
Income allocated to minority interest 486 87
Depreciation and amortization 5,784 4,162
Amortization of deferred financing
costs and loan discounts 1,668 1,713
Equity in earnings of Management Company 263 99
Compensation paid or payable in company stock 1,136 1,183
Provision for uncollectible accounts 228 349
Recognition of deferred rent (691) (549)
Net changes in:
Tenant receivables (1,015) (46)
Other assets (1,359) (1,329)
Account payable and accrued expenses 21 (514)
----------- ---------
Net cash provided by operating
activities 9,466 6,788
--------- ---------
Investing activities:
Additions to rental properties (3,298) (1,420)
Purchase of rental properties (38,962) (13,851)
-------- --------
Net cash used in investing activities (42,260) (15,271)
-------- --------
Financing activities:
Proceeds from line of credit 8,348 -
Proceeds from mortgage notes 30,225 -
Proceeds from issuance of Common Stock - 27,129
Cost of raising capital - (2,334)
Repayment on mortgage notes (612) (2,193)
Additions to deferred financing costs (591) (136)
Repayments of Advances due Principals - (447)
Distributions paid to Preferred Stockholders (4,231) (3,728)
Distributions paid to Common Stockholders (4,720) (3,048)
Distributions paid to minority interest (1,561) (1,167)
------------ ----------
Net cash provided by financing
activities 26,858 14,076
----------- ---------
Net increase (decrease) in cash and equivalents (5,936) 5,593
Cash and equivalents, beginning of period 7,806 1,113
----------- ----------
Cash and equivalents, end of period $1,870 $6,706
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
1. Organization and Business
First Washington Realty Trust, Inc. and subsidiaries
(collectively, the "Company") is the successor to substantially all of
the interests of First Washington Management, Inc. ("FWM"), its
affiliates and certain others in a portfolio of 14 retail and two
multifamily properties owned by FWM and its affiliates (collectively,
the "Existing Properties"), and six properties acquired from unrelated
third parties (the "Acquisition Properties" and collectively, the
"Properties") all located in the Mid-Atlantic region and the economic
beneficiary of the related acquisition, property management, renovation
and third-party businesses (together with the Existing Properties, the
"FWM Group" or "Predecessor") through the issuance of 1,282,051 and
1,920,000 shares of Common and Convertible Preferred Stock,
respectively, (the "Offering") of the Company.
The Company, incorporated in Maryland in April 1994, is
self-managed and self-administered and has elected to be taxed as a
real estate investment trust ("REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"), commencing with its tax year ending
December 31, 1994.
On June 27, 1994, the Company completed a private placement
offering (the "June 1994 Offering") of 1,920,000 shares of 9.75% Series
A Cumulative Participating Convertible Preferred Stock ("Preferred
Stock") with a $0.01 par value per share and a liquidation preference
of $25.00 per share, and 1,282,051 shares of $0.01 par value Common
Stock. The June 1994 Offering price per share of Preferred Stock and
Common Stock was $25.00 and $19.50, respectively, resulting in gross
offering proceeds of $73.0 million. Net of Initial Purchaser's
Discount/Placement Agent's fee and total estimated offering expenses,
the Company received approximately $63.1 million in proceeds.
Simultaneously with the June 1994 Offering, the Company was
admitted as the sole general partner of First Washington Realty Limited
Partnership (the "Operating Partnership"). The transactions leading to
the admittance of the Company into the Operating Partnership were as
follows:
The Operating Partnership was formed via the contribution of
substantially all the assets of or interests in the FWM
Properties by the owners, net of related mortgage
indebtedness. In addition, certain of the Principals
contributed a $4.0 million promissory note with no cost basis
(the "FWM Note") due from First Washington Management, Inc.
("FWM"), operator of the related acquisition, property
management, leasing and brokerage business, to the Company in
exchange for 189,744 shares of Common Stock. The Company was
admitted as the sole general partner of the Operating
Partnership, receiving an approximate ownership interest of
83.5% in exchange for contributing the net June 1994 Offering
proceeds and the FWM Note.
The net proceeds of the June 1994 Offering, together with
borrowings of $38.5 million under new mortgage loans
collateralized by certain of the Properties and the issuance
of $25.0 million of Exchangeable Debentures, were used to
repay indebtedness of $68.1 million including approximately
$3.1 million for prepaid interest and amortization, prepayment
penalties and term extension fees; to purchase the Acquisition
Properties at a cost of $51.9 million; to pay expenses in
connection with the Formation Transactions of $6.5 million;
and, to fund working capital. The original owners' interests
in the properties were converted into 337,732 limited
partnership units, including 2,564 units received by the
Principals in connection with their contribution of all of the
non-voting preferred stock entitled to 99% of the cash flow of
FWM, which are exchangeable on a one-for-one basis for shares
of the Company's common stock.
4
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
----------
Farallon Capital Management, Inc. ("Farallon"), a previously
unrelated third party, along with certain of its affiliates
were reimbursed approximately $1.1 million advanced in
connection with their funding of certain expenses relating to
the Offering and received 102,564 shares of Common Stock with
a value of approximately $2.0 million based upon the June 1994
Offering price of $19.50 per share. The Common Stock issued
was recorded at its fair value with a corresponding increase
in costs of raising capital.
The exchange of the Predecessor for interests in the Operating
Partnership was accounted for as a reorganization of entities under
common control. As such, these assets and liabilities were transferred
and accounted for at historical cost in a manner similar to that in a
pooling of interests.
The Company's assets are held by, and all its operations
conducted through, the Operating Partnership and FWM. As of September
30, 1996, the Company and the Operating Partnership, including
subsidiary partnerships, collectively owned 100% of the properties. Due
to the Company's ability, as the general partner, to exercise both
financial and operational control over the Operating Partnership, the
Operating Partnership is consolidated for financial reporting purposes.
Subsequent to the admittance of the Company, allocation of net income
to the limited partners of the Operating Partnership is based on their
respective partnership interests and is reflected in the accompanying
Consolidated Financial Statements as minority interests. Losses
allocable to the limited partners in excess of their basis are
allocated to the Common Stockholders as the limited partners have no
requirement to fund losses.
The Company's investment in the preferred stock of FWM is
accounted for under the equity method of accounting. In addition to
receiving fees under third-party management, leasing and brokerage
agreements, FWM manages all properties owned by the Operating
Partnership in exchange for a fee.
On September 14, 1994, the Company filed a registration
statement with the Securities and Exchange Commission to register
shares issued or reserved for issuance pursuant to the June 1994
Offering. The registration statement was declared effective on
December 15, 1994.
On June 27, 1995, the Company completed a public offering of
1,450,000 shares of Common stock (the "June 1995 offering"). The shares
of stock were priced at $17.75 per share, resulting in gross offering
proceeds of $25.7 million. The Company netted $23.0 million after
deducting the underwriters discount and estimated offering expenses of
$2.7 million.
On July 27, 1995 an additional 78,393 shares of Common Stock
were issued pursuant to the exercise of a portion of the underwriters
over-allotment option. The Company received additional proceeds of $1.3
million net of the underwriters discount.
2. Purchase of Rental Properties
On June 1, 1995, the Company purchased the Festival at
Woodholme Shopping Center located in Baltimore, Maryland for an
approximate purchase price of $14.3 million. The acquisition was
financed through the issuance of approximately 96,000 shares of
Operating Partnership common units with a value of approximately $1.6
million and assumed mortgage indebtedness of $12.7 million. Concurrent
with the closing, the Company made a $1.0 million mortgage curtailment.
The mortgage bears interest at 9.6% per annum and is payable monthly
based on a 28 year amortization schedule. The loan is due in April
2000. The center is anchored by Sutton Place Gourmet and Pier One
Imports.
5
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
----------
On June 30, 1995, (effective July 1, 1995) the Company
purchased four shopping centers located in Richmond, Virginia for an
approximate purchase price of $20.3 million. The shopping centers are
Glen Lea, anchored by Winn-Dixie Supermarket; Hanover Village, anchored
by Farm Fresh Supermarket; Laburnum Square, anchored by Hannaford
Brothers Supermarket; and Laburnum Park, anchored by Ukrops
Supermarket. The acquisition was financed through the issuance of
approximately 358,000 shares of Preferred Stock with a value of
approximately $8.1 million, and cash of approximately $12.2 million.
On October 12, 1995, the Company purchased Kenhorst Plaza
Shopping Center in Reading, Pennsylvania for an approximate purchase
price of $11.0 million. The center is anchored by Redner's Supermarket
and Rite-Aid Drugs. The property was financed from the proceeds of the
$14.2 million mortgage loan obtained from Lutheran Brotherhood using
Glen Lea, Hanover Village, Laburnum Park and Laburnum Square as
collateral.
On November 15, 1995, the Company purchased Firstfield
Shopping Center located in Gaithersburg, Maryland for an approximate
price of $3.4 million. The acquisition was financed through the
issuance of approximately 36,000 shares of Preferred Stock with a value
of approximately $0.8 million, a seller provided purchase money note in
the amount of approximately $2.5 million and $0.1 million cash.
On January 4, 1996, the Company purchased two shopping
centers, Stefko Boulevard Shopping Center, located in Bethlehem,
Pennsylvania and 15th & Allen Shopping Center, located in Allentown,
Pennsylvania, from one seller for an approximate purchase price of $9.3
million. The shopping centers are each anchored by Laneco Supermarket.
The acquisition was financed through the issuance of approximately
121,000 Common Units with a value of approximately $2.2 million,
mortgage indebtedness of approximately $6.1 million and $1.0 million
cash. The mortgage loan bears interest at 7.745% per annum and is self
amortizing over a 25 year period.
On March 20, 1996, the Company purchased the Clopper's Mill
Village Shopping Center located in Germantown, Maryland for an
approximate purchase price of $20.2 million. The center is anchored by
Shoppers Food Warehouse and CVS/Pharmacy. The purchase was financed
with new mortgage debt of $14.5 million, the issuance of approximately
183,000 Common Units with a value of approximately $3.5 million, the
issuance of approximately 69,000 Preferred Units with a value of
approximately $1.7 million and approximately $.5 million cash. The
mortgage loan bears interest at 7.18% per annum, amortizes over a 25
year period and matures in 10 years.
On March 29, 1996, the company purchased Centre Ridge
Marketplace located in Centreville, Virginia. The purchase price of the
property was $5.5 million. On June 1, 1996, the Company purchased the
Superfresh Supermarket building, which anchors the shopping center for
$3.0 million. The company expects to spend approximately $2.1 million
for the construction of an additional 34,000 square feet. The total
cost of the project will be approximately $11.0 million which will be
financed through a $9.0 million construction loan and $2.0 million of
cash. A portion of the cash came from a draw on the Company's line of
credit.
6
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
----------
On April 29, 1996, the Company purchased Takoma Park Shopping
Center located in Takoma Park, Maryland for an approximate purchase
price of $4.6 million. The center is anchored by Shoppers Food
Warehouse. The purchase was financed with new mortgage debt of $2.4
million and a draw on the Company's line of credit in the amount of
$2.1 million and $0.1 million cash. The Company plans on renovating the
shopping center at a cost of approximately $.8 million. The work is
expected to be completed by October 1996 and will be financed through
additional proceeds from the current first trust lender.
On June 7, 1996, the Company purchased Southside Marketplace
shopping center located in Baltimore, Maryland for an approximate
purchase price of $11.0 million. The center is anchored by Metro Foods
and Rite Aid Drugs. The purchase was financed through the assumption of
an $8.1 million first trust mortgage and a draw on the Company's line
of credit in the amount of approximately $2.9 million.
The following unaudited pro forma condensed consolidated
results of operations are presented as if the acquisitions had occurred
on January 1 of the period presented. In preparing the pro forma data,
adjustments have been made for the June 1995 Offering transactions. The
pro forma information is provided for information purposes only. It is
based on historical information and does not necessarily reflect the
actual results that would have occurred nor is it necessarily
indicative of future results of operations of the Company.
<TABLE>
<CAPTION>
For the nine months ended For the year ended
Sept. 30, December 31,
1996 1995 1995
<S> <C> <C> <C>
Total revenues $31,373 $27,837 $37,865
------- ------- -------
Expenses:
Property operating and
maintenance 7,943 6,560 9,074
General and administrative 2,348 2,152 2,831
Interest 11,800 10,886 14,856
Depreciation and amortization 6,031 5,402 7,419
------ ------ -------
Total Expenses 28,122 25,000 34,180
------ ------ -------
Income before income from
Management Company, minority
interest and distributions to
Preferred Stockholders 3,251 2,837 3,685
Income from Management Company 97 361 449
------ ----- -------
Income before minority interest
and distributions to Preferred
Stockholders 3,348 3,198 4,134
Income allocated to minority
interest (516) (422) (637)
------- ------ -------
Income before distributions to
Preferred Stockholders 2,832 2,776 3,497
Distributions to Preferred
Stockholders (4,231) (4,231) (5,642)
------- ------- -------
Loss allocated to Common
Stockholders $(1,399) $(1,455) $(2,145)
======== ======== ========
Net loss per common share $(0.43) $(0.45) $(0.66)
========= ======== ========
</TABLE>
7
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
----------
3. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited interim consolidated financial
statements of the Company are prepared pursuant to the
Securities and Exchange Commission's rules and regulations for
reporting on Form 10-Q and should be read in conjunction with
the financial statement and the notes thereto of the Company's
1995 Annual Report to Stockholders. Accordingly, certain
disclosures accompanying annual financial statements prepared
in accordance with generally accepted accounting principles
are omitted. In the opinion of management, all adjustments,
consisting solely of normal recurring adjustments, necessary
for fair presentation of the consolidated financial statements
for the interim periods have been included. The current
period's results of operations are not necessarily indicative
of results which ultimately may be achieved for the year.
The consolidated financial statements include the
accounts of the Company and its majority owned partnerships,
including the Operating Partnership. All significant
intercompany balances and transactions have been eliminated.
Loss per Share
Loss per share is calculated by dividing income after
minority interest, less preferred distributions by the
weighted average number of common shares outstanding during
the three months and nine months ended September 30, 1996 and
1995 respectively. The weighted average number of common
shares outstanding during three months ended September 30,
1996 and 1995 were 3,288,000 and 3,076,000, respectively and
the weighted average number of common shares outstanding
during nine months ended September 30, 1996 and 1995 were
3,227,000 and 2,081,000 respectively. Options outstanding are
not included since their inclusion would be anti-dilutive. The
assumed conversion of the Preferred Stock as of the date of
issuance would have been anti-dilutive. The assumed conversion
of the partnership units held by the limited partners of the
Operating Partnership as of the REIT formation, which would
result in the elimination of earnings and losses allocated to
minority interests would have been anti-dilutive, as the
allocation of losses to limited partners was suspended due to
their lack of responsibility to fund losses. The Debentures,
which are exchangeable into shares of Convertible Preferred
Stock, do not meet the criteria for classification as common
stock equivalents.
8
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
----------
4. Summary of Noncash Investing and Financing Activities
Significant noncash transactions for the nine months ended
September 30, 1996 and 1995 and were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Liabilities assumed in purchase of
rental properties $8,097 $11,723
Common units in the Operating Partnership
issued in connection with the purchase
of rental properties - $1,630
Convertible Preferred Stock issued in
connection with the Purchase of UDR
Properties - $8,055
Adjustment for minority interest's
ownership of the operating partnership $1,485 $3,560
Accrual of cost of raising capital - $474
Recognition of excess minority interest
share of losses previously allocated
to common stockholders - $647
</TABLE>
5. Environmental
The Company, as an owner of real estate, is subject to various
environmental laws of Federal and local governments. Compliance by the
Company with existing laws has not had a material adverse effect on its
financial condition and management does not believe it will have such
an effect in the future. However, the Company cannot predict the impact
of new or changed laws or regulations on its current Properties.
All of the Properties have been subjected to Phase I
environmental audits. Such audits have not revealed, nor is management
aware of any environmental liability that management believes would
have a material adverse impact on the consolidated financial position,
results from operations or liquidity, including the two situations
discussed below. Management is unaware of any instances in which it
would incur and be financially responsible for any material
environmental costs if any or all Properties were sold, disposed of or
abandoned.
9
<PAGE>
Contamination caused by dry cleaning solvents has been
detected in ground water below the Penn Station Shopping Center. The
source of the contamination has not been determined. Potential sources
include a dry cleaner tenant at the Penn Station Shopping Center and a
dry cleaner located in an adjacent property. Sampling conducted at the
site indicates that the contamination is limited and is unlikely to
have any effect on human health. The Company has made a request for
closure to the State of Maryland. Management believes that there is
very little exposure at this time, and therefore has not recorded an
accrued environmental clean-up liability.
Petroleum has been detected in the soil of a parcel adjacent
to Fox Mill Shopping Center on property occupied by Exxon Corporation
("Exxon") for use as a gas station (the "Exxon Station"). Exxon has
taken steps to remediate the petroleum in and around the Exxon Station,
which is located down-gradient from the Fox Mill Shopping Center. Exxon
has agreed to take full responsibility for the remediation of such
petroleum. Currently, there has been no contamination of the Company's
property and none is expected to occur. In addition, a dry cleaning
solvent has been detected in the groundwater below the Fox Mill
Shopping Center. A groundwater pump and treatment system, approved by
the Virginia Water Control Board, was installed in July 1992, and was
operating until recently when the Control Board ordered quarterly
sampling to determine if further remediation is necessary. The cost of
running the pumps and monitoring the contamination is approximately $10
per annum. The previous owner of the Fox Mill Shopping Center has
agreed to fully remediate the groundwater contamination. Management
does not believe that it has a material probable liability,
notwithstanding the pledge of the previous owner and the Company
believes that there is minimal exposure at this time, and therefore has
not recorded an accrued environmental clean-up liability.
6. Subsequent Events
On October 19, 1996, the Board of Directors declared a
distribution of $0.4875 and $.6094 per share of Common Stock and
Preferred Stock, respectively to shareholders of record as of November
1, 1996, payable on November 15, 1996.
On November 1, 1996, the Company filed a registration
statement on Form S-11 and Prospectus with the SEC to sell 1,500,000
shares of Common Stock. The net proceeds to the Company from the sale
of Common Stock, after payment of all expenses, are estimated to be
approximately $27.9 million ($32.1 million if the Underwriters'
over-allotment option is exercised in full). The net cash proceeds of
the Offering will be used as follows: approximately $18.8 million for
the purchase of six retail properties (the balance of the purchase
price will be paid for by the issuance of Common Units with a value of
approximately $6.1 million and mortgage indebtedness of approximately
$29.3 million); approximately $4.7 million to repay existing
indebtedness, approximately $1.9 million for property expansions and
approximately $2.5 million for working capital.
The Company filed an amendment to Form S-11 on November 12,
1996.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Overview
The following discussion should be read in conjunction with the
"Selected Consolidated Financial Information" and the Financial Statements and
notes thereto of the Company appearing elsewhere in this Form 10-Q.
Comparison of the three months ended September 30, 1996 to the three months
ended September 30, 1995
For the three months ended September 30, 1996, the net loss allocated
to common stockholders decreased by $1,406,000 from $1,717,000 to $311,000, when
compared to the three months ended September 30, 1995, primarily due to an
increase in revenues and a decrease in the amount of income allocated to
minority interest, off set by an increase in expenses and distributions to
holders of Convertible Preferred Stock.
10
<PAGE>
Total revenues increased by $2,810,000 or 36.5%, from 7,704,000 to
10,514,000, due primarily to an increase in minimum rents of $2,238,000 and
tenant reimbursements of $567,000. The increases were primarily due to the
purchase of Kenhorst Plaza on October 12, 1995 and Firstfield Shopping Center on
November 15, 1995 (the "1995 Acquisitions") and the purchase of Stefko Boulevard
and 15th & Allen on January 4, 1996, Clopper's Mill Village Center on March 1,
1996, Centre Ridge Marketplace on March 29, 1996, Takoma Park Shopping Center on
April 29, 1996 and Southside Marketplace on June 7, 1996 (the "1996
Acquisitions").
Property operating and maintenance expense increased by $844,000, or
47.2%, from $1,787,000 to $2,631,000, due primarily to the purchase of the 1995
Acquisition and 1996 Acquisition properties. General and administrative expenses
decreased by $1,089,000, from $1,737,000 to $648,000, due primarily to a
decrease in the amount of compensation paid in company stock from $1,500,000 to
$393,000.
Interest expense increased by $1,154,000, or 40.6%, from $2,845,000 to
$3,999,000, due primarily to the increase mortgage indebtedness associated with
the purchase of the 1995 Acquisition and 1996 Acquisition properties.
Depreciation and amortization expenses increased by $506,000, or 33.0%,
from $1,533,000 to $2,039,000, primarily due to the purchase of the 1995
Acquisition and 1996 Acquisition properties.
During the three months ended September 30, 1996, distributions payable
to owners of the Convertible Preferred Stock increased from $1,388,000 to
$1,410,000 due to the issuance of Preferred Stock to the former owners of
Firstfield Shopping Center on November 15, 1995.
Income allocated to minority interests decreased by $30,000 from an
income allocation of $218,000 to an income allocation of $188,000.
Comparison of the nine months ended September 30, 1996 to the nine months ended
September 30, 1995
For the nine months ended September 30, 1996, the net loss allocated to
common stockholders decreased by $809,000 from a net loss of $2,095,000 to a net
loss of $1,286,000, when compared to the nine months ended September 30, 1995,
primarily due to an increase in the amount of revenues offset by an increase in
expenses, distributions to holders of Convertible Preferred Stock, and income
allocated to minority interest.
Total revenues increased by $9,300,000 or 44.7%, from $20,800,000 to
$30,100,000, primarily due to an increase in minimum rents of $6,800,000 and
tenant reimbursements of $1,909,000. The increases were primarily due to the
1995 and 1996 Acquisitions.
Property operating and maintenance expense increased by $2,600,000, or
52.0%, from $5,000,000 to $7,600,000, primarily due to the 1995 and 1996
Acquisitions. General and administrative expenses increased by 9.1% or $200,000,
from $2,200,000 to $2,400,000, primarily due to New York Stock Exchange filing
fees of $200,000, bonuses of $200,000 and other expenses of $200,000 offset by a
decrease of $400,000 for compensation paid or payable in Company stock.
Interest expense increased by $2,900,000, or 35.8% from $8,100,000, to
$11,000,000, primarily due to the increased mortgage indebtedness associated
with the purchase of the 1995 and 1996 Acquisitions.
Depreciation and amortization expenses increased by $1,600,000, or
38.1%, from $4,200,000 to $5,800,000, primarily due to the 1995 and 1996
Acquisitions.
During the nine months ended September 30, 1996, distributions payable
to owners of the Convertible Preferred Stock increased from $3,800,000 to
$4,200,000 due to the issuance of Preferred Stock to the former owners of
Laburnum Park Shopping Center, Laburnum Square Shopping Center, Glen Lea
Shopping Center, Hanover Village Shopping Center and Firstfield Shopping Center.
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Income allocated to minority interest increased by $400,000 from
$100,000 to $500,000 due to an increase in net income.
Liquidity and Capital Resources
Indebtedness
As of September 30, 1996, the Company had total indebtedness of
approximately $187.3 million (including $25.0 million of debentures and
approximately $162.3 million of mortgages and lines of credit). The mortgage
indebtedness consisted of approximately $155.0 million in indebtedness
collateralized by 32 of the Properties and tax-exempt bond financing obligations
issued by the Philadelphia Authority for Industrial Development (the "Bond
Obligations") of approximately $7.3 million collateralized by one of the
properties. Of the Company's mortgage indebtedness, $26.8 million (14.3%) is
variable rate indebtedness, and $160.5 million (85.7%) is at a fixed rate. This
indebtedness has interest rates ranging from 5.0% to 9.6%, with a weighted
average interest rate (excluding the Bond Obligations) of 7.5%, and will mature
between 1997 and 2021. A large portion of the Company's indebtedness will become
due by 1999, requiring payments of $3.2 million in 1997, $13.5 million in 1998
and $87.0 million in 1999. From 1997 through 2021, the Company will have to
refinance an aggregate of approximately $187.7 million. Since the Company
anticipates that only a small portion of the principal of such indebtedness will
be repaid prior to maturity and the Company will likely not have sufficient
funds on hand to repay such indebtedness, the Company will need to refinance
such indebtedness through modification or extension of existing indebtedness,
additional debt financing or through an additional offering of equity
securities.
The Debentures are exchangeable in the aggregate for 1,000,000 shares
of Preferred Stock of the Company, subject to adjustment. Interest on the
Debentures is payable quarterly, in arrears. The Debentures are redeemable by
the Operating Partnership at any time on or after July 15, 1999, or at any time
for certain reasons intended to protect the Company's status as a REIT, at the
option of the Company, at 100% of the principal amount thereof, together with
accrued interest. The rights of holders of Common Stock and Preferred Stock are
effectively subordinated to the rights of holders of Debentures. The Debentures
are collateralized by a first mortgage on two of the properties.
The Operating Partnership issued a $4.8 million note (the "FS Note") as
consideration for part of the purchase price for one of the rental properties.
The Company has guaranteed the Operating Partnership's obligations under the FS
Note. The FS Note has a base interest rate of 5.0% per annum and a term of six
years. The holder has the right at any time after June 27, 1995 to exchange the
FS Note for shares of Common Stock in accordance with a formula based on the
annual distributions per share on the Common Stock and the interest payments on
the FS Note. Based on the current interest rate on the FS Note (5% base rate)
and the current distribution payments made on the Common Stock, the $4.8 million
FS Note is exchangeable for 123,077 shares of Common Stock, having a value of
approximately $2.6 million. If the FS Note is exchanged for Common Stock, the
Company may contribute the FS Note to the capital of the Operating Partnership
in exchange for additional Common Units.
The Company currently has a collateralized revolving line of
credit ("Line of Credit") of up to $5.8 million from First Union Bank. Loans
under the Line of Credit will bear interest at LIBOR plus two percent (2%) per
annum, and will mature on June 30, 1998. Loans under the Line of Credit will be
collateralized by a first mortgage lien on one of the Properties. Definitive
agreements with respect to the Line of Credit contain customary representations,
warranties and covenants. The loan agreement with respect to the Line of Credit
calls for the amount of the facility to be curtailed at any point when it
exceeds 75% of the appraised value of the collateral. The Company has an
additional collateralized revolving line of credit of approximately $8.25
million with Mellon Bank. Loans under this line will bear interest at LIBOR plus
two percent. Currently, $8.3 million are drawn under the lines of credit.
The Company expects to meet its short-term liquidity requirements
generally through its working capital, net cash provided by operations and draws
on its Line of Credit facility. The Company believes that the foregoing sources
of liquidity will be sufficient to fund liquidity needs through 1997.
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The Company expects to meet certain long-term liquidity requirements
such as development, property acquisitions, scheduled debt maturities,
renovations, expansions and other non-recurring capital improvements through
long-term secured and unsecured indebtedness, including the Line of Credit and
the issuance of additional equity securities. The Company also expects to use
funds available under the Line of Credit to fund acquisitions, development
activities and capital improvements on an interim basis.
The Company has elected to qualify as a REIT for federal income tax
purposes commencing with its tax year ended December 31, 1994. To qualify as a
REIT, the Company is required, among other items, to pay distributions to its
shareholders of at least 95% of its taxable income. The Company intends to make
quarterly distributions to its shareholders from operating cash flow.
Inflation, Economic Conditions
Most of the Company's leases contain provisions designed to partially
mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rents based on tenant's gross sales
above predetermined levels, which rents generally increase as prices rise, or
escalation clauses which are typically related to increases in the Consumer
Price Index or similar inflation indices. Most of the Company's leases require
the tenant to pay its share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
In addition, the Company periodically evaluates its exposure to interest rate
fluctuations, and may enter into interest rate protection agreements which
mitigate, but do not eliminate, the effect of changes in interest rates on its
floating rate loans. The Company, as a general policy, endeavors to obtain
long-term fixed rate financing when obtainable.
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Part II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company *
3.2 Bylaws of the Company *
10.1 First Amended and Restated Agreement of Limited Partnership
of First Washington Realty Limited Partnership *
10.2 Negotiable Promissory Note between First Washington Management,
Inc. and Stuart D. Halpert *
10.3 Negotiable Promissory Note between First Washington Management,
Inc. and William J. Wolfe *
10.4 Negotiable Promissory Note between First Washington Management,
Inc. and Jack Spector *
10.5 Negotiable Promissory Note between First Washington Management,
Inc. and Lester Zimmerman *
10.6 Term Loan Note dated June 27, 1994 in the approximate amount of
$4.8 million from First Washington Realty Limited Partnership in
favor of First State Plaza Associates L.P. *
10.7 Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases and
Rents dated as of June 27, 1994, between JFD Limited Partnership,
Greenspring Associates Limited Partnership and FW-Bryans Road
Limited Partnership as mortgagors, trustors and debtors, Nomura
Asset Capital Corporation, as mortgagee, beneficiary, and secured
party, and Douglas J. Mathis and Kelly M. Wrenn, as individual
trustees. *
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10.8 Promissory Note in the principal amount of $38.5 million dated
June 27, 1994 from the Company in favor of Nomura Asset Capital
Corporation *
10.9 Cash Collateral Account Security, Pledge and Assignment Agreement
among JFD Limited Partnership, Greenspring Associates Limited
Partnership and FW-Bryans Road Limited Partnership as borrowers,
and Nomura Asset Capital Corporation, as Lender *
10.10 The 1994 Stock Option Plan of First Washington Realty Trust,
Inc., First Washington Realty Limited Partnership and First
Washington Management, Inc.*
10.11 Amended and Restated Executive Employment Agreement, dated
June 30, 1996, between the Company and Stuart D. Halpert (7).
10.12 Amended and Restated Executive Employment Agreement, dated
June 30, 1996, between the Company and William J. Wolfe (7).
10.13 Indemnity, Pledge and Security Agreement dated June 27, 1994
between the Operating Partnership, Stuart D. Halpert, William J.
Wolfe, Lester Zimmerman and Jack E. Spector *
10.14 Term Loan Agreement dated as of June 27, 1994 between the
Company and First State Plaza Associates Limited Partnership *
10.15 Stock Option Agreement between the Company and William J.
Wolfe (1)
10.16 Stock Option Agreement between the Company and Stuart D.
Halpert (1)
10.17 Stock Option Agreement between the Company and Jeffrey S.
Distenfeld (1)
10.18 Stock Option Agreement between the Company and James
Blumenthal (1)
10.19 Stock Option Agreement between the Company and James G.
Pounds (1)
10.20 Stock Option Agreement between the Company and Stanley T.
Burns (1)
10.21 Stock Option Agreement between the Company and Matthew J.
Hart (1)
10.22 Stock Option Agreement between the Company and William J.
Russell (1)
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10.23 Stock Option Agreement between the Company and Heywood
Wilansky (1)
10.24 Purchase Agreement dated March 30, 1995, between First Washington
Realty Trust, Inc. and United Dominion Realty Trust, Inc. *
10.25 Contribution Agreement dated May 3, 1995 between First Washington
Realty Limited Partnership and Stewart J. Greenebaum, Samuel G.
Rose and Woodholme Center, Inc., all of the general and limited
partners of Woodholme Properties Limited Partnership. *
10.26 Real Estate Purchase Agreements dated May 1, 1995 between First
Washington Realty Trust, Inc. And United Dominion Realty Trust,
Inc. (2)
10.27 Form of Registration Rights Agreement between First Washington
Realty Trust, Inc. and United Dominion Realty Trust, Inc. (2)
10.28 Real Estate Purchase Agreement dated August 18, 1995 between
First Washington Realty Limited Partnership and Kenhorst Plaza
Associates, L.P. (3)
10.29 Deed of Trust and Security Agreement dated October 6, 1995
between First Washington Realty Limited Partnership and Lutheran
Brotherhood and Deed of Trust Note of even date therewith (3)
10.30 Real Estate Purchase Agreement dated November 15, 1995, by and
between First Washington Realty Trust, Inc. and Firstfield Center
Duncan Limited Partnership (4)
10.31 Contribution Agreement dated October 30, 1995, by and between
First Washington Realty Limited Partnership and Carriage
Associates Limited Partnership (4)
10.32 Purchase Money Deed of Trust dated November 15, 1995, by and
between First Washington Realty Limited Partnership and Army
and Air Force Mutual Aid Associate (4)
10.33 Mortgage, Assignment of Leases and Rents and Security Agreement
dated January 4, 1996, by and between Allenbeth Associates
Limited Partnership (First Washington Realty Trust, Inc. is the
sole general partner) and Nomura Asset Capital Corporation (4)
10.34 Real Estate Purchase Agreement dated February 1, 1996, by and
between First Washington Realty Limited Partnership and Centre
Ridge Development L.P. (5)
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10.35 Agreement to Sell Real Estate dated March 28, 1996, by and
between First Washington Realty Limited Partnership and Super
Fresh Food Markets of Virginia, Inc. (5)
10.36 Contribution Agreement dated March 20, 1996 (effective as of
March 1, 1996), by and between First Washington Realty Limited
Partnership and Brian G. McElwee, Richard W. Ireland, John H.
Donegan, Stacy C. Hornstein, Sweet Gum Tree, L.L.C.
and Wendy A. Seher (5)
10.37 Amendment and Restatement of Deed of Trust, Assignment and
Security Agreement dated March 21, 1996 by and between Clopper's
Mill Village Center, L.L.C., Timothy R. Casgar and Margaret
Everson-Fisher, Trustees, and Jackson National
Life Insurance Company (5)
10.38 Credit Line Deed of Trust and Security Agreement dated March 28,
1996 by and between First Washington Realty Limited Partnership,
Sam T. Beale and Barry Musselman, as Trustees and South Trustees,
and SouthTrust Bank of Alabama, N.A. (5)
10.39 Real Estate Purchase Agreement dated October 23, 1995 by and
between First Washington Realty Limited Partnership and 6875
New Hampshire Avenue Partnership (6).
10.40 Purchase Money Deed of Trust and Security Agreement dated April
24, 1996 by and between First Washington Realty Limited
Partnership and Nicoletta R. Parker and Margaret H. Blewitt,
as Trustees (6).
10.41 Purchase Agreement dated April 4, 1996 by and between First
Washington Realty Limited Partnership and Michael F. Klein,
Philip E. Klein, Jeffrey F. Klein, George Arconti, Professional
Real Estate Services, Inc., H.S. Taylor White, Rick
C. Klein and William S. Berman (6).
10.42 Indemnity Deed of Trust, Security Agreement and Assignment of
Rents and Leases dated June 28, 1995 by and between Southside
Marketplace Limited Partnership in favor of Fleet Management
and Recovery Corporation (6).
10.43 First Washington Realty Trust, Inc. Restricted Stock Plan (6).
10.44 The Contingent Stock Agreement dated June 30, 1996 by and between
First Washington Realty Trust, Inc. and William J. Wolfe (6).
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10.45 The Contingent Stock Agreement dated June 30, 1996 by and between
First Washington Realty Trust, Inc. and Stuart D. Halpert (6).
10.46 Restricted Stock Agreement dated June 30, 1996 by and between
First Washington Realty Trust, Inc. and William J. Wolfe (6).
10.47 Restricted Stock Agreement dated June 30, 1996 by and between
First Washington Realty Trust, Inc. and Stuart D. Halpert (6).
10.48 Real Estate Purchase Agreement dated September 23, 1996, by and
between Newtown Square Associates, L.P. and First Washington
Realty Limited Partnership (7).
* Incorporated herein by reference from the Company's Registration
Statement on Form S-11 (No. 33-83960), in which this exhibit
bore the same number.
(1) Incorporated herein by reference from the Company's Form 10-K
filed on March 31, 1995, in which this exhibit bore the same
number.
(2) Incorporated herein by reference from Amendment No. 2 to the
Company's Registration Statement on Form S-11 (No. 33-93188),
in which this exhibit bore the same number.
(3) Previously filed with the Company's Quarterly Report on
Form 10-Q on November 11, 1995.
(4) Previously filed with the Company's Current Report on
Form 8-K on January 19, 1996.
(5) Previously filed with the Company's Current Report on
Form 8-K on April 1, 1996.
(6) Incorporated herein by reference from Amendment No.2 of the
Company's Registration Statement on Form S-3 (No. 333-4966),
in which this exhibit bore the same number.
(7) Filed herewith.
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(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST WASHINGTON REALTY TRUST, INC.
/s/ William J. Wolfe
By: William J. Wolfe
President and
Chief Executive Officer
/s/ James G. Blumenthal
By: James G. Blumenthal
Executive Vice President and
Chief Financial Officer
Date: November 14, 1996
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