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 June 30, 1998
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
Common Stock, $.01 par value, outstanding as of August 13, 1998:
8,556,985 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 June 30, 1998 (unaudited) and
December 31, 1997 1
Consolidated Statements of Operations (unaudited) for the three
months and six months ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 1998 and 1997 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II: Other Information
Item 2. Market for the Registrant's Common Equity and Related
Shareholders Matters 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share data)
-----------
<TABLE>
<S> <C> <C>
June 30, December 31,
1998 1997
--------- ------------
(unaudited)
ASSETS
Rental properties:
Land $ 99,719 $ 89,042
Buildings and improvements 407,635 367,756
-------- --------
507,354 456,798
Accumulated depreciation (44,626) (40,839)
--------- ---------
Rental properties, net 462,728 415,959
Cash and equivalents 5,187 3,142
Tenant receivables, net 7,576 7,274
Deferred financing costs, net 2,519 2,734
Other assets 10,081 10,032
----------- -----------
Total assets $488,091 $439,141
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $243,426 $212,030
Debentures 25,000 25,000
Accounts payable and accrued expenses 9,014 10,914
----------- -----------
Total liabilities 277,440 247,944
Minority interest 50,478 38,255
Stockholders' equity:
Convertible preferred stock $.01 par value,
3,800,000 shares designated; 2,314,189 issued
and outstanding (aggregate liquidation
preference of $57,855) 23 23
Common stock $.01 par value, 90,000,000 shares
authorized; 7,405,179 and 7,291,732 shares
issued and outstanding, respectively 74 72
Additional paid-in capital 189,472 179,356
Accumulated distributions in excess of earnings (29,396) (26,509)
---------- -----------
Total stockholders' equity 160,173 152,942
-------- ----------
Total liabilities and stockholders'
equity $488,091 $439,141
======== ========
</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
(in thousands, except per share data)
(unaudited)
-------
<TABLE>
<S> <C> <C> <C> <C>
For three For six
months ended months ended
June 30, June 30,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
Revenues:
Minimum rents $14,054 $10,275 $26,982 $19,907
Tenant reimbursements 3,399 2,108 6,487 4,231
Percentage rents 359 245 755 573
Other income 300 260 528 536
------- ------- ------ ------
Total revenues 18,112 12,888 34,752 25,247
------- ------- ------ -----
Expenses:
Property operating and maintenance 4,441 2,913 8,584 5,967
General and administrative 1,015 1,282 1,852 2,140
Interest 5,120 4,556 9,971 8,928
Depreciation and amortization 3,656 2,656 6,921 5,117
------- ------- ------ ------
Total expenses 14,232 11,407 27,328 22,152
------- ------- ------ ------
Income before gain on sale of properties,
income from Management Company,
extraordinary item, minority interest
and distributions to Preferred Stockholders 3,880 1,481 7,424 3,095
Gain on sale of properties 0 0 1,683 45
Income from Management Company 60 136 340 299
------- ----- ------ -----
Income before extraordinary item,
minority interest and distributions
to Preferred Stockholders 3,940 1,617 9,447 3,439
Extraordinary item - loss on early
extinguishment of debt 0 0 (358) (134)
------- ------- ------ -------
Income before minority interest and
distributions to Preferred Stockholders 3,940 1,617 9,089 3,305
Income allocated to minority interest (887) (242) (1,953) (499)
------- ------- ------ -------
Income before distributions to
Preferred Stockholders 3,053 1,375 7,136 2,806
Distributions to Preferred Stockholders (1,410) (1,410) (2,820) (2,820)
------- ------- ------- -------
Income (loss) allocated to Common
Stockholders $1,643 ($35) $4,316 ($14)
======= ======= ======= =======
Earnings (loss) per Common Share - Basic
Income (loss) before extraordinary item $0.22 ($0.01) $0.63 $0.03
Extraordinary item 0.00 0.00 (0.05) (0.03)
------- ------- ------- -------
Net income (loss) $0.22 ($0.01) $0.58 $0.00
======= ======= ======= =======
Earnings per Common Share - Diluted
Income (loss) before extraordinary item $0.22 ($0.01) $0.63 $0.03
Extraordinary item 0.00 0.00 (0.05) (0.03)
------- ------- ------- -------
Net income (loss) $0.22 ($0.01) $0.5 $0.00
======= ======= ======= =======
Shares of Common Stock, - Basic 7,405 4,989 7,395 4,968
======= ======= ======= =======
Shares of Common Stock, - Diluted 7,488 5,058 7,486 5,028
======= ======= ======= =======
Distributions per share $0.4875 $0.4875 $0.9750 $0.9750
======= ======= ======= =======
</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>
<S> <C> <C>
For the six months ended
June 30,
------------------------
1998 1997
---------- ----------
Operating Activities:
Income before distributions to
Preferred Stockholders $7,136 $2,806
Adjustment to reconcile net cash provided
by operating activities:
Income allocated to minority interest 1,953 499
Depreciation and amortization 6,921 5,117
Gain of sale of rental properties (1,683) (45)
Loss on early extinguishment of debt 358 134
Amortization of deferred financing costs
and loan premiums (273) 902
Equity in earnings of Management Company (100) (59)
Compensation paid or payable in company stock 655 1,400
Provision for uncollectible accounts 921 759
Recognition of deferred rent (404) (621)
Net changes in:
Tenant receivables (818) (1,282)
Other assets (244) 602
Account payable and accrued expenses (628) 149
---------- ----------
Net cash provided by operating activities 13,794 10,361
--------- --------
Investing Activities:
Additions to rental properties (2,119) (4,841)
Acquisition of rental properties (21,968) (16,751)
Proceeds from sale of rental properties 4,253 1,172
--------- ---------
Net cash used in investing activities (19,834) (20,420)
-------- --------
Financing Activities:
Net proceeds from line of credit 22,637 18,100
Proceeds from mortgage notes 318 2,235
Proceeds from issuance of common stock - 2,000
Proceeds from exercise of stock options 37 -
Repayment on mortgage notes (1,670) (11,918)
Additions to deferred financing costs (672) (525)
Distributions paid to Preferred Stockholders (2,820) (2,820)
Distributions paid to Common Stockholders (7,203) (4,823)
Distributions paid to minority interest (2,542) (1,320)
-------- ---------
Net cash provided by financing activities 8,085 929
--------- ---------
Net increase (decrease) in cash and equivalents 2,045 (9,130)
Cash and equivalents, beginning of period 3,142 11,780
--------- --------
Cash and equivalents, end of period $5,187 $2,650
======== ========
</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. Business
General
-------
First Washington Realty Trust, Inc. (the "Company") is a fully
integrated real estate organization with expertise in acquisitions,
property management, leasing, renovation and development of principally
supermarket- anchored neighborhood shopping centers. The Company owns a
portfolio of 52 retail properties containing a total of approximately
5.6 million square feet of gross leasable area located in the
Mid-Atlantic region and the Chicago metropolitan area.
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").
The Company currently owns approximately 77.1% of the
partnership interests in First Washington Realty Limited Partnership
(the "Operating Partnership"). All of the Company's operations are
conducted through the Operating Partnership. The Operating Partnership
owns 34 Properties directly and 18 Properties are owned by lower tier
partnerships or limited liability companies in which the Operating
Partnership owns a 99% partnership interest and the Company (or a
wholly-owned subsidiary of the Company) owns a 1% partnership interest.
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. 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 Operating Partnership also owns 100% of the non-voting
preferred stock of First Washington Management, Inc. ("FWM") and is
entitled to 99% of the cash flow from FWM. FWM provides management,
leasing and related services for the Properties and to third-party
clients, including individual, institutional and corporate property
owners. FWM is also referred to herein as the "Management Company".
2. 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 statements and the
notes thereto of the Company's 1997 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.
4
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
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.
Income per Share
----------------
Basic and diluted income per share is calculated by dividing
income after minority interest, less preferred distributions by the
weighted average number of common shares outstanding during the periods
presented.
Recent Accounting Pronouncements
--------------------------------
On March 19, 1998, the Emerging Issues Task Force ("EITF") of
the Financial Accounting Standards Board reached a consensus opinion on
issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions" which requires that the internal costs of
preacquisition activities incurred in connection with the acquisition
of an operating property be expensed as incurred. The Company has
historically capitalized internal preacqusition costs of operating
properties as a component of the acquisition price. The Company
capitalized $227 for the period January 1 through March 19, 1998 and
$123 for the six months ended June 30, 1997. The Company will realize
an increase in general and administrative expense due to the adoption
of this ruling which is effective immediately.
On May 21, 1998, the Emerging Issues Task Force ("EITF") of
the Financial Accounting Standards Board reached a consensus opinion on
Issue No. 98-9, "Accounting for Contingent Rent In Interim Financial
Periods" which provides that recognition of rental income in interim
periods must be deferred until the specified target that triggers the
contingent rental income is achieved. The Company has historically
recognized rental income based on a percentage of tenant sales ratably
over the course of the year. This consensus is effective May 21, 1998
and will require the Company to defer recognition of this income until
the date that the tenant's sales exceed the breakpoint set forth in the
lease agreement. The Company believes the impact of this consensus will
be to decrease percentage rentals in the fiscal year ending December
31, 1998 by approximately $240. Additionally, the amount of percentage
rentals recognized in each quarter of subsequent fiscal years will
differ from historical experience, with a significant concentration of
revenue being recognized in the fourth quarter.
During the second quarter, the Financial Accounting Standards
Board issued SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities", which will be effective for the Company's fiscal
year 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The statement also requires that changes in the derivative's
fair value be recognized in earnings unless specific hedge accounting
criteria are met. The Company is currently assessing the impact of this
new statement on its consolidated financial position, liquidity, and
results of operations.
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income" on January 1, 1998. The Company has no items of other
comprehensive income.
3. Acquisition of Rental Properties
During the first six months of 1998, the Company acquired five
shopping centers for an aggregate acquisition cost of approximately
$57,363. All the acquisitions were accounted for using the purchase
method of accounting and the operations of each property is included in
the Company's Statement of Operations from their respective dates of
acquisition. The following is a summary of the acquisitions:
5
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Date Total Anchor Anchor
Acquired Property Name Location GLA Cost Tenant (GLA)
- --------------------------------------------------------------------------------
1/98 Bowie Plaza Bowie, MD 104,836 $12,135 Giant Food 21,750
3/98 Watkins Park Mitchellville,
Plaza MD 112,143 14,662 Safeway 43,205
4/98 Parkville
Shopping Center Baltimore, MD 140,925 8,388 A&P Superfresh 39,571
5/98 Elkridge Corners Elkridge, MD 73,529 8,873 A&P Superfresh 18,750
6/98 Village Ukrop's
Shopping Center Richmond, VA 110,885 13,305 Supermarket 39,003
------- ------- -------
542,318 $57,363 162,279
======= ======= =======
</TABLE>
The acquisitions were financed as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of Assumed Line of
Property Partnerships Market Mortgage Credit
Name Units Value Debt (1) Draw Cash Total
- -------------------------------------------------------------------------------
Bowie Plaza 130,626 $3,592 $5,374 $3,000 $ 169 $12,135
Watkins Park Plaza - - - 10,000 4,662 (2) 14,662
Parkville
Shopping Center 185,361 4,819 3,182 - 387 8,388
Elkridge Corners 89,109 2,228 6,645 - - 8,873
Village Shopping Center 373,162 9,702 - 3,500 103 13,305
------- ------- ------- ------- ------- -------
778,258 $20,341 $15,201 $16,500 $5,321 $57,363
======= ======= ======= ====== ====== =======
</TABLE>
(1) Includes loan premiums.
(2) Includes net proceeds from the sale of properties of
approximately $4,253.
The following unaudited pro forma condensed combined results
of operations are presented as if the acquisitions of the rental
properties occurred on January 1 of the period presented. In preparing
the pro forma data, adjustments have been made to assume that the
September 1997 Offering occurred on January 1, 1997. The proforma
statements are provided for information purposes only. They are based
on historical information and do not necessarily reflect the actual
results that would have occurred nor are they necessarily indicative of
future results of operations of the Company.
<TABLE>
<S> <C> <C>
For the six months ended
June 30,
--------------------------
1998 1997
-------- --------
Total Revenues $35,862 $35,232
======= =======
Pro forma net income before gain on sale
of properties and extraordinary item $3,706 $2,888
Gain on sale or properties 0 1,728
Extraordinary item (121) (1,191)
----- -------
Pro forma net income $3,585 $3,425
====== ======
Pro forma earnings per Common Share - Basic
Income before gain on sale of
properties and extraordinary item $0.50 $0.41
Gain on sale of properties $0.00 $0.25
Extraordinary item (0.02) (0.17)
------ ------
Net income $0.48 $0.49
===== =====
Pro forma earnings per Common Share - Diluted
Income before gain on sale of
properties and extraordinary item $0.50 $0.41
Gain on sale of properties $0.00 $0.24
Extraordinary item (0.02) (0.17)
------ ------
Net income $0.48 $0.48
===== =====
</TABLE>
6
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
4. Sale of Properties
In March 1998, the Company sold its two multi-family
properties (Branchwood and Park Place Apartments) for a combined sales
price of approximately $8,050. The gain on sale is approximately $1,536
and net proceeds after the payment of the existing mortgage debt was
approximately $3,962. In March 1998, the Company sold one of the
Georgetown retail shops consisting of 5,000 square feet for $750. The
gain on sale is approximately $147 and net proceeds after the payment
of existing mortgage debt was approximately $291. The proceeds of these
sales were used to purchase Watkins Park Plaza in a like-kind exchange
as defined in Internal Revenue Code Section 1031.
5. Line of Credit
In January 1998, the Company closed on a $35,500
collateralized revolving Line of Credit with Union Bank of Switzerland.
This line is collateralized by six properties (Kenhorst Plaza, Shoppes
of Graylyn, Four Mile Fork, Takoma Park, Centre Ridge Marketplace and
Newtown Square). The line which matures on January 31, 2001 replaces
the Lines of Credit the Company had with Mellon Bank and Corestates
Bank. Loans under this line will bear interest at LIBOR plus one
percent (1%). The line was subsequently increased to $45,000 on March
20, 1998 and Watkins Park Plaza was pledged as additional collateral.
6. Summary of Noncash Investing and Financing Activities
Significant noncash transactions for the six months ended
June 30, 1998 and 1997 were as follows:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Liabilities assumed in acquisition
of rental properties $15,201 $16,843
Common units in the Operating
Partnership issued in connection
with the acquisition of rental properties $20,341 $4,660
Preferred units in the Operating
Partnership issued in connection with
the acquisition of rental properties - $277
Increase in minority interest's ownership of the
Operating Partnership $12,813 $1,258
Accrued compensation paid through the issuance
of Common Stock $760 -
</TABLE>
7. Stock Option Plans
On May 8, 1998, the Stockholders approved an amendment to the
Company's 1994 Stock Option Plan. The amendment increases the number of
shares available for issuance under the Stock Option Plan from 796,691
to 1,296,691 shares.
On May 8, 1998, the Stockholders approved an amendment to the
Company's 1996 Restricted Stock Plan. The Amendment increases the
number of shares available for issuance under the Restricted Stock Plan
from 18,508 to 368,508 shares.
On May 8, 1998, the Stockholders approved an amendment to the
Company's 1996 Contingent Stock Agreements. The amendment further
grants an additional 150,000 shares of Common Stock to senior
management under a performance-based incentive plan.
7
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
8. Subsequent Events
In July 1998, the Company completed a public offering of
1,150,000 shares of Common Stock (the "July 1998 Offering"). The shares
of stock were priced at $23.75, resulting in net proceeds of
approximately $25,600 after deducting the underwriter's discount and
offering expenses of approximately $1,700. The proceeds of the offering
were used to pay down the Company's Line of Credit.
On July 17, 1998, the Board of Directors declared a
distribution of $0.4875 and $0.6094 per share of Common Stock and
Preferred Stock, respectively to shareholders of record as of August 1,
1998, payable on August 15, 1998.
8
<PAGE>
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. Dollars are
in thousands except per share data.
Comparison of the three months ended June 30, 1998 to the three months ended
June 30, 1997
For the three months ended June 30, 1998, the net income allocated to
common stockholders increased by $1,678 from a net loss of ($35) to a net income
of $1,643, when compared to the three months ended June 30, 1997, primarily due
to an increase in revenues offset by an increase in expenses, and an increase in
the amount of income allocated to minority interests.
Total revenues increased by $5,224 or 40.5%, from $12,888 to $18,112,
due primarily to an increase in minimum rents of $3,779 and tenant
reimbursements of $1,291. The increases were primarily due to the purchase of
the six Chicago properties purchased in September 1997, Mitchellville Plaza in
October 1997, Spring Valley Center in December 1997 (the "1997 Acquisitions"),
Bowie Plaza in January 1998, Watkins Park Plaza in March 1998, Parkville
Shopping Center in April 1998, Elkridge Corners Shopping Center in May 1998, and
Village Shopping Center in June 1998 (the "1998 Acquisitions").
Property operating and maintenance expense increased by $1,528, or
52.5%, from $2,913 to $4,441, due primarily to the 1997 Acquisitions and the
1998 Acquisitions. General and administrative expenses decreased by $267 or
20.8%, from $1,282 to $1,015 due primarily to a decrease in the amount of
compensation paid or payable in Company stock of $682, offset by an increase in
internal preacquisition costs of $176, cash bonuses of $100 and other cash
expenses of $139. Prior to March 19, 1998, internal preacquisition costs were
capitalized and included in the cost of acquiring rental properties.
Interest expense increased by $564, or 12.4%, from $4,556 to $5,120,
due primarily to the increased mortgage indebtedness associated with the 1997
Acquisitions and the 1998 Acquisitions offset by a reduction of mortgage debt
through proceeds from the September 1997 offering and a decrease in the weighted
average interest rate. The average debt outstanding increased from $216.6
million for 1997 to $260.1 million for 1998 and the weighted average interest
rate decreased from 8.4% to 7.9%.
Depreciation and amortization expenses increased by $1,000, or 37.7%,
from $2,656 to $3,656, primarily due to the 1997 Acquisitions and the 1998
Acquisitions.
Income allocated to minority interests increased by $645 from $242 to
$887 due to an increase in net income and an increase in the minority interests'
ownership of the Operating Partnership from 15.0% to 22.9%.
Comparison of the six months ended June 30, 1998 to the six months ended
June 30, 1997
For the six months ended June 30, 1998, the net income allocated to
common stockholders increased by $4,330 from a net loss of $14 to a net income
of $4,316, when compared to the six months ended June 30, 1997, primarily due to
an increase in revenues off set by an increase in expenses and an increase in
the amount of income allocated to minority interests.
9
<PAGE>
Total revenues increased by $9,505 or 37.6%, from $25,247 to $34,752,
due primarily to an increase in minimum rents of $7,075 and tenant
reimbursements of $2,256. The increases were primarily due to the purchase of
Ashburn Farm Village Shopping Center in March 1997, the six Chicago properties
purchased in September 1997, Mitchellville Plaza in October 1997, Spring Valley
Center in December 1997 (the "1997 Acquisitions"), Bowie Plaza in January 1998,
Watkins Park Plaza in March 1998, Parkville Shopping Center in April 1998,
Elkridge Corners Shopping Center in May 1998, and Village Shopping Center in
June 1998 (the "1998 Acquisitions").
Property operating and maintenance expense increased by $2,617, or
43.9%, from $5,967 to $8,584, due primarily to the 1997 and 1998 Acquisitions.
General and administrative expenses decreased by $288 or 13.5%, from $2,140 to
$1,852 due primarily to an decrease in the amount of compensation paid or
payable in Company stock of $900 offset by an increase in internal
preacquisition costs of $176, cash bonuses of $200 and other cash expenses of
$236. Prior to March 19, 1998, internal preacquisition costs were capitalized
and included in the cost of acquiring rental properties.
Interest expense increased by $1,043, or 11.7%, from $8,928 to $9,971, due
primarily to the increased mortgage indebtedness associated with the 1997 and
1998 Acquisitions offset by a reduction in mortgage debt from the proceeds of
the September 1997 offering and a reduction in the weighted average interest
rate. The average debt outstanding increased from $210.3 million for 1997 to
$252.3 million for 1998, and the weighted average interest rate decreased from
8.5% to 7.9%.
Depreciation and amortization expenses increased by $1,804, or 35.3%,
from $5,117 to $6,921, primarily due to the 1997 and 1998 Acquisitions.
During 1998, a gain on sale of properties of $1,683 was realized and
there was a $358 extraordinary loss due to the early extinguishment of debt. For
the same period in 1997, a gain on sale of properties of $45 was realized and
there was a $134 extraordinary loss due to the early extinguishment of debt.
In 1998, the Company sold its two multi-family properties (Branchwood
and Park Place) and one of the Georgetown retail shops retiring $4,236 of
mortgage debt associated with these properties. In 1997, the Company sold
Thieves Market in which $734 of mortgage debt associated with the property was
retired.
Income allocated to minority interests increased by $1,454 from $499 to
$1,953 due to an increase in net income and an increase in the minority
interests ownership of the Operating Partnership from 15.1% to 22.9%.
Liquidity and Capital Resources
Indebtedness
As of June 30, 1998, the Company had total indebtedness of
approximately $268.4 million (including $25.0 million of debentures and
approximately $243.4 million of mortgage indebtedness). The mortgage
indebtedness consists of approximately $236.5 million in indebtedness
collateralized by 35 of the Properties and tax-exempt bond financing obligations
issued by the Philadelphia Authority for Industrial Development (the "Bond
Obligations") of approximately $6.9 million collateralized by one of the
properties. Of the Company's indebtedness, $39.5 million (14.7%) is variable
rate indebtedness, and $228.9 million (85.3%) is at a fixed rate. The effective
interest rates of the indebtedness range from 6.3% to 9.8%, with a weighted
average interest rate of 7.9%, and will mature between 1999 and 2014. A large
portion of the Company's indebtedness will become due by 2000, requiring balloon
payments of $88.9 million in 1999, and $24.4 million in 2000. From 1999 through
2014, the Company will have to refinance an aggregate of approximately $228.5
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 Company currently has two collateralized revolving lines of
credit (the "Lines of Credit") totaling
10
<PAGE>
approximately $51 million. In January 1998, the Company closed on $35,500
collateralized revolving Line of Credit with Union Bank of Switzerland. This
line is collateralized by six properties (Kenhorst Plaza, Shoppes of Graylyn,
Four Mile Fork, Takoma Park, Centre Ridge Marketplace and Newtown Square). The
line which matures on January 31, 2001 replaces the Lines of Credit the Company
had with Mellon Bank and Corestates Bank. Loans under this line will bear
interest at LIBOR plus one percent (1%). The line was subsequently increased to
$45,000 on March 20, 1998 and Watkins Park Plaza was pledged as additional
collateral. The Company has a collateralized revolving line of credit of up to
$5.8 million from First Union Bank. Loans under the line of credit bear interest
at LIBOR plus two percent (2%) per annum, and mature on June 30, 1998. Loans
under the line of credit are collateralized by a first mortgage lien on
Brafferton Shopping Center. As of June 30, 1998, there was $25,937 outstanding
under the Lines of Credit which is reflected as mortgage notes payable and
included in the discussion of mortgage indebtedness above.
Liquidity
The Company expects to meet its short-term liquidity requirements
generally through its working capital, net cash provided by operations and draws
on the Lines of Credit. The Company believes that the foregoing sources of
liquidity will be sufficient to fund liquidity needs through 1999.
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 Lines of Credit and
the issuance of additional equity securities. The Company also expects to use
funds available under the Lines of Credit to fund acquisitions, development
activities and capital improvements on an interim basis.
During 1999, $88.9 million of the Company's indebtedness becomes due,
including the $25.0 million Exchangeable Debentures. The Company believes that
it will be able to retire this debt through either a refinancing of the debt
using the properties as collateral, an equity offering or a combination of both.
The Company currently believes that the loan-to-values on the properties are at
a level that will enable the Company to refinance the loans without an
additional requirement for capital.
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.
New Accounting Standards
On March 19, 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus opinion on issue No. 97-11,
"Accounting for Internal Costs Relating to Real Estate Property Acquisitions"
which requires that the internal costs of preacquisition activities incurred in
connection with the acquisition of an operating property be expensed as
incurred. The Company has historically capitalized internal preacqusition costs
of operating properties as a component of the acquisition price. The Company
capitalized $227 for the period January 1 through March 19, 1998 and $123 for
the six months ended June 30, 1997. The Company will realize an increase in
general and administrative expense due to the adoption of this ruling which is
effective immediately.
On May 21, 1998, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus opinion on Issue No.
98-9, "Accounting for Contingent Rent In Interim Financial Periods" which
provides that recognition of rental income in interim periods must be deferred
until the specified target that triggers the contingent rental income is
achieved. The Company has historically recognized rental income based on a
percentage of tenant sales ratably over the course of the year. This consensus
is effective May 21, 1998 and will require the Company to defer recognition of
this income until the date that the tenant's sales exceed the breakpoint set
forth in the lease agreement. The Company believes the impact of this consensus
will be to decrease percentage rentals in the fiscal year ending December 31,
1998 by approximately $240. Additionally, the amount of percentage rentals
recognized in each quarter of subsequent fiscal years will differ from
historical experience, with a significant concentration of revenue being
recognized in the fourth quarter.
11
<PAGE>
During the second quarter, the Financial Accounting Standards Board
issued SFAS 133 "Accounting for Derivative Instruments and Hedging Activities",
which will be effective for the Company's fiscal year 2000. This statement
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company is currently assessing the impact of
this new statement on its consolidated financial position, liquidity, and
results of operations.
The Company has considered the effects that the year
2000 may have on its computer hardware and software application. The Company
does not believe that there will be a material effect on the Company's
operations or future financial results.
12
<PAGE>
Part II
OTHER INFORMATION
Item 2. Recent Sales of Unregistered Equity Securities
(a) Securities Sold
The following table sets forth the date of sale, title and
amount of unregistered securities sold by the Company since
December 31, 1997:
<TABLE>
<S> <C> <C>
Date of Sale Title Amount
01/01/98 Common Units 130,626
04/30/98 Common Units 185,361
05/28/98 Common Units 89,109
06/01/98 Common Units 373,162
</TABLE>
(b) Underwriters and other purchasers
i. January 1, 1998 Sales. Underwriters were not retained
in connection with the sale of these securities. These
units were sold to the seller of Bowie Plaza, an
"accredited investor".
ii. April 30, 1998 Sales. Underwriters were not retained
in connection with the sale of these securities. These
units were sold to the seller of Parkville Shopping
Center, an "accredited investor".
iii. May 28, 1998 Sales. Underwriters were not retained in
connection with the sale of these securities. These
units were sold to the seller of Elkridge Corners, an
"accredited investor".
iv. June 1, 1998 Sales. Underwriters were not retained in
connection with the sale of these securities. These
units were sold to the seller of Village Shopping
Center, an "accredited investor".
(c) Consideration
i. January 1, 1998 Sales. These units were issued in
exchange for property having a value of approximately
$6.8 million, net of assumed indebtedness. There were
no underwriting discounts or commissions with respect
to such securities.
ii. April 30, 1998 Sales. These units were issued in
exchange for property having a value of approximately
$5.2 million, net of assumed indebtedness. There were
no underwriting discounts or commissions with respect
to such securities.
iii. May 28, 1998 Sales. These units were issued in
exchange for property having a value of approximately
$2.2 million, net of assumed indebtedness. There were
no underwriting discounts or commissions with respect
to such securities.
iv. June 1, 1998 Sales. These units were issued in
exchange for property having a value of approximately
$9.8 million, net of assumed indebtedness. There were
no underwriting discounts or commissions with respect
to such securities.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (1)
- -----------------------------------------------------------------------
(1) Filed herewith.
(b) Reports on Form 8-K.
An interim report on Form 8-K was filed on May 18, 1998 including
certain exhibits thereto.
An interim report on Form 8-K was filed on June 17, 1998
reporting the acquisition of five retail properties.
An interim report on Form 8-K was filed on July 28, 1998
regarding recently enacted legislation.
An interim report on Form 8-K was filed on July 31, 1998
including certain exhibits thereto.
14
<PAGE>
SIGNATURES
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.
FIRST WASHINGTON REALTY TRUST, INC.
Date: August 13, 1998 /s/ William J. Wolfe
------------------------------
By: William J. Wolfe
President and
Chief Executive Officer
Date: August 13, 1998 /s/ James G. Blumenthal
---------------------------------
By: James G. Blumenthal
Executive Vice President and
Chief Financial Officer
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,187
<SECURITIES> 0
<RECEIVABLES> 7,576
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 507,354
<DEPRECIATION> 44,626
<TOTAL-ASSETS> 488,091
<CURRENT-LIABILITIES> 0
<BONDS> 243,426
0
23
<COMMON> 74
<OTHER-SE> 189,472
<TOTAL-LIABILITY-AND-EQUITY> 488,091
<SALES> 0
<TOTAL-REVENUES> 34,752
<CGS> 0
<TOTAL-COSTS> 17,357
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,971
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,674
<DISCONTINUED> 0
<EXTRAORDINARY> (358)
<CHANGES> 0
<NET-INCOME> 4,316
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
