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, 1999
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 November 10, 1999:
9,465,059 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, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Operations (unaudited) for
the three months and nine months ended September 30,
1999 and 1998 2
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended September 30, 1999 and 1998 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Qualitative and Quantitative Disclosures about Market Risk 13
Part II: Other Information
Item 2. Market for the Registrant's Common Equity and Related
Shareholders Matters 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share data)
-----------
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
Rental properties:
Land $114,756 $108,562
Buildings and improvements 472,854 447,584
-------- --------
587,610 556,146
Accumulated depreciation (63,636) (51,475)
-------- --------
Rental properties, net 523,974 504,671
Cash and equivalents 3,629 3,163
Tenant receivables, net 10,735 9,463
Deferred financing costs, net 5,179 1,921
Other assets 12,654 13,736
-------- --------
Total assets $556,171 $532,954
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $270,558 $244,113
Debentures - 25,000
Accounts payable and accrued expenses 11,424 11,542
-------- --------
Total liabilities 281,982 280,655
Minority interest 65,308 66,218
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock $.01 par value,
3,800,000 shares designated; 2,692,049 and
2,314,189 issued and outstanding, respectively
(aggregate liquidation preference of $73,870
and $57,855 respectively) 27 23
Common stock $.01 par value, 90,000,000 shares
authorized; 9,457,541 and 8,566,985 shares issued
and outstanding, respectively 95 86
Additional paid-in capital 245,333 218,345
Accumulated distributions in excess of earnings (37,074) (32,373)
-------- --------
Total stockholders' equity 208,381 186,081
-------- --------
Total liabilities and stockholders' equity $556,171 $532,954
======== ========
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)
-------
For three months ended For nine months ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Minimum rents $16,765 $14,707 $49,187 $41,689
Tenant reimbursements 3,828 3,360 12,232 9,847
Percentage rents 435 170 1,317 925
Other income 594 326 1,452 854
------- ------- ------- -------
Total revenues 21,622 18,563 64,188 53,315
------- ------- ------- -------
Expenses:
Property operating and
maintenance 4,676 4,254 14,669 12,838
General and
administrative 1,004 857 3,168 2,709
Interest 4,864 4,811 16,066 14,782
Depreciation and
amortization 4,288 3,766 12,781 10,687
------- ------- ------- -------
Total expenses 14,832 13,688 46,684 41,016
------- ------- ------- -------
Income before gain
on sale of properties,
income (loss)from
Management Company,
extraordinary item,
minority interest and
distributions to
Preferred
Stockholders 6,790 4,875 17,504 12,299
Gain on sale of
properties - 335 - 2,018
Income (loss) from
Management Company (444) (59) (674) 281
------- ------- ------- -------
Income before
extraordinary item,
minority interest
and distributions to
Preferred
Stockholders 6,346 5,151 16,830 14,598
Extraordinary item -
loss on early
extinguishment of
debt - - - (358)
------- ------- ------- -------
Income before minority
interest and
distributions to
Preferred
Stockholders 6,346 5,151 16,830 14,240
Income allocated to
minority interest (1,512) (1,116) (4,091) (3,069)
------- ------- -------- -------
Income before
distributions to
Preferred
Stockholders 4,834 4,035 12,739 11,171
Distributions to
Preferred
Stockholders (1,658) (1,410) (4,480) (4,231)
------- ------- ------- -------
Income allocated to
Common Stockholders $3,176 $2,625 $8,259 $6,940
======= ======= ======= =======
Earnings per Common
Share - Basic
Income before
extraordinary
item $0.34 $0.31 $0.93 $0.94
Extraordinary item 0.00 0.00 0.00 (0.05)
------- ------- ------- -------
Net income $0.34 $0.31 $0.93 $0.89
======= ======= ======= =======
Earnings per Common
Share - Diluted
Income before
extraordinary
item $0.33 $0.31 $0.91 $0.93
Extraordinary item 0.00 0.00 0.00 (0.05)
------- ------- ------- -------
Net income $0.33 $0.31 $0.91 $0.88
======= ======= ======= =======
Weighted Avg. Shares
of Common Stock-
Basic 9,411 8,506 8,928 7,769
======= ======= ======= =======
Weighted Avg. Shares
of Common Stock-
Diluted 9,529 8,560 9,036 7,848
======= ======= ======= =======
Distributions per
share $0.4875 $0.4875 $1.4625 $1.4625
======= ======= ======= =======
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)
--------
Nine months ended
September 30, 1999
------------------
1999 1998
---- ----
Operating Activities:
Income before distributions to Preferred Stockholders $12,739 $11,171
Adjustment to reconcile net cash provided by operating
activities:
Income allocated to minority interest 4,091 3,069
Depreciation and amortization 12,781 10,687
Gain of sale of rental properties - (2,018)
Loss on early extinguishment of debt - 358
Amortization of deferred financing costs and loan
premiums (402) (428)
Equity in earnings of Management Company 1,034 79
Compensation paid or payable in common stock 936 953
Provision for uncollectible accounts 657 1,163
Recognition of deferred rent (922) (807)
Net changes in:
Tenant receivables (1,007) (762)
Other assets (2,385) (5,434)
Accounts payable and accrued expenses 205 108
------- -------
Net cash provided by operating activities 27,727 18,139
------- -------
Investing Activities:
Additions to rental properties (4,136) (3,443)
Acquisition of rental properties (10,797) (21,970)
Proceeds from sale of rental properties - 4,957
------- -------
Net cash used in investing activities (14,933) (20,456)
-------- -------
Financing Activities:
Net proceeds from line of credit 27,000 30,937
Net Proceeds from mortgage notes refinancings 18,822 318
Proceeds from issuance of common stock - 25,781
Proceeds from exercise of stock options 62 57
Repayment of line of credit (23,200) (32,237)
Mortgage notes principal payments (7,414) (2,431)
Additions to deferred financing costs (4,030) (689)
Distributions paid to Preferred Stockholders (4,480) (4,231)
Distributions paid to Common Stockholders (12,960) (11,374)
Distributions paid to minority interest (6,128) (4,088)
-------- -------
Net cash provided by (used in) financing
activities (12,328) 2,043
-------- -------
Net change in cash and equivalents 466 (274)
Cash and equivalents, beginning of period 3,163 3,142
-------- -------
Cash and equivalents, end of period $3,629 $2,868
======== =======
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 that 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 owns a
portfolio of 57 retail properties containing a total of approximately
6.2 million square feet of gross leasable area ("GLA") located in the
Mid-Atlantic region and the Chicago, Illinois metropolitan area.
The Company currently owns approximately 75.0% 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 38 Properties directly and 19 Properties are owned by lower tier
entities in which the Operating Partnership owns a 99% partnership
interest and the Company (or a wholly-owned subsidiary of the Company)
owns a 1% 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" or
"Management Company") 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.
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 1998 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 entities, including the Operating
Partnership. All significant intercompany balances and transactions
have been eliminated.
4
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
Derivatives
-----------
The Company may enter into various forward interest rate swap
arrangements from time to time in anticipation of a specific debt
transaction. These arrangements are used to manage the Company's
exposure to fluctuations in interest rates. The Company does not
utilize these arrangements for trading or speculative purposes. These
arrangements, considered qualifying hedges, are not recorded in the
financial statements until the debt transaction is consummated and the
arrangement is settled. The proceeds or payments resulting from the
settlement of the arrangement are deferred and amortized over the life
of the debt as an adjustment to interest expense. Premiums paid to
purchase interest rate protection agreements (such as caps) are
capitalized and amortized over the terms of those agreements using the
interest method. Unamortized premiums are included in deferred
financing costs in the consolidated balance sheet. Amounts received
under the interest rate protection agreements are recorded as a
reduction of interest expense.
3. Acquisitions of Rental Properties
During the first nine months of 1999, the Company acquired two
shopping centers for an aggregate acquisition cost of approximately
$27,349. The acquisitions were accounted for using the purchase method
of accounting and the operations of the properties are included in the
Company's Statement of Operations from the dates of acquisition. The
following is a summary of the acquisition transactions:
<TABLE>
<S>
<C> <C> <C> <C> <C>
Date Property Total
Acquired Name Location GLA Cost
-------- ------------- -------- ------ -------
1/99 Kamp Washington Fairfax, Virginia 71,825 $15,204
8/99 Newark Shopping Ctr Newark, Delaware 182,860 12,145
------- -------
254,685 $27,349
<C> <C>
Anchor Anchor
Tenant (GLA)
------ ------
Border Books 30,000
</TABLE>
<TABLE>
<S>
The acquisitions were financed as follows:
<C> <C> <C> <C>
Number of
Partnership Market Assumed Mortgage
Property Name Units Value Debt (1)
------------- ----------- ------ ---------------
Kamp Washington - $ - $ 3,045
Newark Shopping Center 103,795 2,309 9,364
------- ------ -------
103,795 $2,309 $12,409
======= ====== =======
<C> <C> <C>
Line of Credit
Draw Cash Total
-------------- ------ -------
$ 9,800 $2,339 (2) $15,184
- 472 12,145
------- ------ -------
$ 9,800 $2,811 $27,329
======= ====== =======
</TABLE>
(1) Includes loan premiums.
(2) Includes net proceeds from the sale of properties that
occurred in the fourth quarter of 1998. Approximately
$1,814 of net proceeds were used to acquire Kamp
Washington in a Section 1031 tax free exchange.
5
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
The following unaudited pro forma results of operations are
presented as if the acquisitions and sales of the rental properties
that occurred during 1998 and 1999, and the July 1998 offering had
occurred on January 1, 1998. 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.
For the nine months ended
September 30,
-------------------------
(unaudited)
1999 1998
---- ----
Pro forma Total Revenues $65,247 $60,528
======= =======
Pro forma net income $ 8,429 $ 7,399
======= =======
Pro forma earnings per Common Share-Basic $ 0.94 $ 0.87
======= =======
Pro forma earnings per Common Share-Diluted $ 0.93 $ 0.86
======= =======
4. Mortgage Debt
In February 1999 the Company signed an application with Metropolitan
Life Insurance Company ("Met Life") for six separate loans totaling $75.0
million. The loans were all closed by June 30, 1999 as follows:
Interest Term Closing
Collateral Properties Amount Rate (years) Date
- --------------------- ------ -------- ------- -------
Mallard Creek Shopping Center $10,900 6.85% 10 April 30, 1999
McHenry Commons 6,700 6.85% 10 April 30, 1999
Davis Ford Crossing 10,700 6.79% 10 May 28, 1999
First State Plaza 13,700 6.79% 10 May 28, 1999
Valley Centre 21,200 6.84% 12 May 28, 1999
Fox Mill Shopping Center 11,800 6.84% 12 June 29, 1999
------
$75,000
There are six separate loans and six separate mortgages. The loans are
not cross-collateralized and allow for the assumption of each individual loan to
a qualified buyer upon sale of the property by the Company. The all-in weighted
average interest rate of the loans will be 7.31% including the amortization of
financing costs and the costs of closing out interest rate swap agreements as
discussed below. Monthly debt service payments will be based on a 25 year
amortization schedule. The proceeds of the loans were used to retire the Nomura
($38,500), Mallard Creek ($11,400) and McHenry Commons ($6,300) loans. Excess
proceeds of approximately $18,800 were used to pay down 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)
With the application to Met Life the Company executed a rate lock
agreement thereby fixing the interest rate for the term of the loans.
Accordingly, in February 1999 the Company closed out the three swap agreements
which were to commence in 1999. These agreements, which had a combined notional
amount of $73.5 million, were closed out at combined cost for the Company of
$3,100. This cost will be amortized over the life of the Met Life loan using the
effective interest rate method.
5. Debentures
The $25,000, 8.25% Debentures matured on June 27, 1999. The holder of
the Debentures exercised the option to exchange the Debentures for one million
shares of Convertible Preferred Stock on June 27, 1999. The Debentures were
collateralized by the Fox Mill and Penn Station properties which became
unencumbered. Fox Mill was subsequently used as collateral for the Met Life
loan.
6. Preferred Stock
Effective June 1, 1999, shares of Convertible Preferred Stock became
convertible into 1.282051 shares of Common Stock. As of September 30, 1999,
625,980 shares of Convertible Preferred Stock were converted into 802,538 shares
of Common Stock. The Company may redeem the Convertible Preferred Stock
commencing July 15, 1999 at a redemption price of $27.44 per share. The
redemption price reduces annually thereafter to $26.95, $26.46, $25.98, $25.49
and finally to $25.00 on July 15, 2004.
7. Stock Option Plan
In May 1999, under the current Stock Option Plan the Company issued
183,000 options to officers and employees at a strike price of $20.75 per share
and 20,000 options to its directors at a strike price of $21.75 per share.
8. Summary of Noncash Investing and Financing Activities
Significant noncash transactions for the nine months ended September
30, 1999 and 1998 were as follows:
1999 1998
---- ----
Liabilities assumed in acquisition of rental properties $12,409 $15,201
Common units in the Operating Partnership issued
in connection with the acquisition of rental properties $ 2,309 $20,341
Increase in minority interest's ownership of the
Operating Partnership $ 1,128 $15,266
Accrued compensation paid through the issuance
of Common Stock $ 1,258 $ 898
Exchange of Debentures for 1,000,000 shares of
Preferred Stock $25,000 -
7
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
9. Business Segments
The Company owns one property type only (i.e. neighborhood shopping
centers). Resource allocation, determination of compensation packages and
financial analysis is performed by the Company's management for each segment.
The Company measures performance of the segments based on total revenues less
property operating and maintenance expenses, as detailed in the following table:
Retail
Properties FWM Other (1) Total
---------- --- --------- -----
Nine months ended September 30, 1999:
Revenues $ 63,266 $4,782 ($3,860) $ 64,188
Operating and maintenance expenses 14,669 5,456 (5,456) 14,669
-------- ------ ------ --------
Income (loss) from operations $ 48,597 ($ 674) $1,596 $ 49,519
======== ====== ====== ========
Commercial real estate property
expenditures $ 31,465 $ - $ - $ 31,465
======== ====== ====== ========
Segment assets at September 30, 1999 $556,171 $ - $ - $556,171
======== ====== ====== ========
Nine months ended September 30, 1998:
Revenues $ 52,508 $4,938 ($4,131) $ 53,315
Operating and maintenance expenses 12,838 4,657 (4,657) 12,838
-------- ------ ------ --------
Income from operations $ 39,670 $ 281 $ 526 $ 40,477
======== ====== ====== ========
Commercial real estate property
expenditures $ 60,806 $ - $ - $ 60,806
======== ====== ====== ========
Segment assets at September 30, 1998 $487,818 $ - $ - $487,818
======== ====== ====== ========
Retail
Properties FWM Other (1) Total
---------- --- --------- -----
Three months ended September 30, 1999:
Revenues $ 21,332 $1,406 ($1,116) $ 21,622
Operating and maintenance expenses 4,676 1,850 (1,850) 4,676
-------- ------ ------ --------
Income (loss) from operations $ 16,656 ($ 444) $ 734 $ 16,946
======== ====== ====== ========
Commercial real estate property
expenditures $ 13,456 $ - $ - $ 13,456
======== ====== ====== ========
Segment assets at September 30, 1999 $556,171 $ - $ - $556,171
======== ====== ====== ========
Three months ended September 30, 1998:
Revenues $ 18,160 $1,343 ($ 940) $ 18,563
Operating and maintenance expenses 4,254 1,402 (1,402) 4,254
-------- ------ ------ --------
Income (loss) from operations $ 13,906 ($ 59) $ 462 $ 14,309
======== ====== ====== ========
Commercial real estate property
expenditures $ 1,324 $ - $ - $ 1,324
======== ====== ====== ========
Segment assets at September 30, 1998 $487,818 $ - $ - $487,818
======== ====== ====== ========
8
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
---------
The following table reconciles income from operations for reportable
segments to income before extraordinary items as reported in the Consolidated
Statements of Operations.
Three months ended Nine months ended
September 30, September 30,
------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
Income from operations for reportable
segments $16,946 $14,309 $49,519 $40,477
General and administrative expenses (1,004) (857) (3,168) (2,709)
Interest expense (4,864) (4,811) (16,066) (14,782)
Depreciation and amortization (4,288) (3,766) (12,781) (10,687)
Income allocated to minority interest (1,512) (1,116) (4,091) (3,069)
Distributions to Preferred Stockholders (1,658) (1,410) (4,480) (4,231)
Income (loss) from Management Company (444) (59) (674) 281
Gain on sale of properties - 335 - 2,018
------ ------- ------- ------
Income before extraordinary items $ 3,176 $ 2,625 $ 8,259 $ 7,298
======= ======= ======= =======
(1) Represents the adjustment for straight-lining of rents and reflecting the
net income from FWM using the equity method of accounting.
10. Subsequent Events
On October 16, 1999, 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 November 1, 1999, payable on November 15, 1999.
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 September 30, 1999 to the three months
ended September 30, 1998
For the three months ended September 30, 1999, the net income allocated to
common stockholders increased by $551 or 21.0% from $2,625 to $3,176, when
compared to the three months ended September 30, 1998, due to an increase in
revenues which were primarily due to the purchase of Wilston Centre I, Wilston
Centre II and Town Center at Sterling in November 1998 (the "1998
Acquisitions"), and Kamp Washington in January 1999 and Newark in August 1999
(the "1999 Acquisitions"), offset by an increase in expenses and income
allocated to minority interest.
9
<PAGE>
Total revenues increased by $3,059 or 16.5%, from $18,563 to $21,622, due
primarily to an increase in minimum rents of $2,058, tenant reimbursements of
$468 and other income of $268 due to termination fees paid. The increases were
primarily due to the 1998 Acquisitions and 1999 Acquisitions.
Property operating and maintenance expense increased by $422, or 9.9%, from
$4,254 to $4,676, due primarily to the 1998 Acquisitions and the 1999
Acquisitions. General and administrative expenses increased by $147 or 17.2%,
from $857 to $1,004. General and Administrative expenses as a percent of total
revenues remained the same at 4.6%
Interest expense increased by $53, or 1.1%, from $4,811 to $4,864 due
primarily to the increased mortgage indebtedness associated with the 1998
Acquisitions and the 1999 Acquisitions offset by the conversion of the $25,000
debentures to Preferred Stock in June 1999. The average debt outstanding
increased from $255.9 million for 1998 to $264.8 million for 1999 and the
weighted average interest rate decreased from 7.5% to 7.4%.
Depreciation and amortization expenses increased by $522 or 13.9%, from
$3,766 to $4,288, primarily due to the 1998 Acquisitions and the 1999
Acquisitions.
During 1998, there was a $335 gain on sale of properties. There were no
such transactions during 1999.
Income allocated to minority interests increased by $396 or 35.5% from
$1,116 to $1,512 due to an increase in earnings of $1,195 ($259) and an increase
in the minority interests' ownership of the Operating Partnership during the
period from 21.7% to 23.8% ($137).
Comparison of the nine months ended September 30, 1999 to the nine months ended
September 30, 1998
For the nine months ended September 30, 1999, the net income allocated to
common stockholders increased by $1,319 or 19.0% from $6,940 to $8,259, when
compared to the nine months ended September 30, 1998 due to an increase in
revenues which were primarily due to the purchase of Watkins Park Plaza in March
1998, Parkville Shopping Center in April 1998, Elkridge Corners Shopping Center
in May 1998, Village Shopping Center in June 1998, Wilston Centre I, Wilston
Centre II and Town Center at Sterling in November 1998 (the "1998
Acquisitions"), and Kamp Washington in January 1999 and Newark Shopping Center
in August 1999 (the "1999 Acquisitions"), offset by a gain on sale of properties
of $2,018 recorded during the first and third quarters of 1998, an increase in
expenses and an increase in income allocated to minority interest.
Total revenues increased by $10,873 or 20.4%, from $53,315 to $64,188, due
primarily to an increase in minimum rents of $7,498 and tenant reimbursements of
$2,385. The increases were primarily due to the 1998 Acquisitions and the 1999
Acquisitions.
Property operating and maintenance expense increased by $1,831 or 14.3%,
from $12,838 to $14,669, due primarily to the 1998 Acquisitions and the 1999
Acquisitions. General and administrative expenses increased by $459 or 16.9%,
from $2,709 to $3,168 due primarily to an increase in the amount of compensation
paid or payable in Company stock of $100 and an increase in the amount of
internal preacquisition costs of $166. Prior to March 19, 1998, internal
preacquisition costs were capitalized and included in the cost of acquiring
rental properties. General and Administrative expenses as a percentage of
revenues decreased from 5.1% to 4.9%.
Interest expense increased by $1,284, or 8.7%, from $14,782 to $16,066 due
primarily to the increased mortgage indebtedness associated with the 1998
Acquisitions and the 1999 Acquisitions offset by the conversion of the $25,000
debentures to Preferred Stock in June 1999. The average debt outstanding
increased from $253.5 million for 1998 to $276.8 million for 1999 and the
weighted average interest rate decreased from 7.8% to 7.7%.
10
<PAGE>
Depreciation and amortization expenses increased by $2,094 or 19.6%, from
$10,687 to $12,781, primarily due to the 1998 Acquisitions and the 1999
Acquisitions.
During 1998, there was a $2,018 gain on sale of properties, and a $358
extraordinary loss due to the early extinguishment of debt. There were no such
transactions during 1999.
Income allocated to minority interests increased by $1,022 or 33.3% from
$3,069 to $4,091 due to an increase in earnings of $2,590 ($559) and an increase
in the minority interests' ownership of the Operating Partnership during the
period from 21.6% to 24.3% ($463).
Liquidity and Capital Resources
Indebtedness
As of September 30, 1999, the Company had total mortgage indebtedness of
approximately $270.6 million. The mortgage indebtedness consists of
approximately $263.9 million in indebtedness collateralized by 41 of the
properties and tax-exempt bond financing obligations issued by the Philadelphia
Authority for Industrial Development (the "Bond Obligations") of approximately
$6.7 million collateralized by one of the properties. Of the Company's
indebtedness, $26.2 million (9.7%) is variable rate indebtedness, and $244.4
million (90.3%) is at a fixed rate. The effective interest rates of the
indebtedness range from 5.1% to 9.8%, with a weighted average interest rate of
7.6%, and will mature between 1999 and 2014. Approximately 13.3% of the
Company's indebtedness will become due by 2000, requiring balloon payments of
$3.7 million in 1999, and $24.4 million in 2000. From 1999 through 2014, the
Company will have to refinance an aggregate of $216.7 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 Company currently has two collateralized revolving lines of credit (the
"Lines of Credit"). The Company has a collateralized revolving Line of Credit of
up to $51,000 (which was increased from $45,000 to $51,000 on October 27, 1999)
with Union Bank of Switzerland. This line is collateralized by seven properties
(Kenhorst Plaza, Shoppes of Graylyn, Watkins Park Plaza, Four Mile Fork, Takoma
Park, Centre Ridge Marketplace and Newtown Square). The line matures on February
1, 2001 and loans under this line bear interest at LIBOR plus one percent
(1%). The Company has an additional collateralized revolving Line of Credit of
up to $5,775 from First Union Bank. Loans under this line bear interest at
LIBOR plus two percent (2%) per annum, and is on a month-to-month basis. This
Line of Credit is collaterized by a first mortgage lien on Brafferton Shopping
Center. As of September 30, 1999, there was $13,000 outstanding under the Lines
of Credit.
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 2000.
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.
11
<PAGE>
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.
Other
Year 2000 Issue
The "Year 2000 Issue" is the result of many existing computer programs
using only the last two digits to refer to a year. Therefore, these computer
programs may not properly recognize a year that begins with "20" instead of the
familiar "19".
If not corrected, many computer applications could fail or create erroneous
results.
The Company is in the process of conducting a review of its computer
systems to identify which systems could be affected by the "Year 2000" problem
and to what extent such problems will have an impact on the Company 's ability
to conduct its business.
The Company has developed a Year 2000 Compliance Plan ("The Plan") to
address these issues. The Plan is being managed by two of the Company's senior
executives and has been approved by senior management. The progress of the Plan
is being monitored by the Company's Board of Directors. The Plan focuses on four
major components: IT systems such as the Company's accounting and property
management software packages and related hardware; non-IT systems such as the
Company's telephone system, voice mail system and other office equipment; the
state of readiness of the Company's critical trading partners such as its banks,
utilities and tenants; and embedded systems, particularly those located at the
Company's Retail Properties such as sprinkler systems, security systems, etc.
(Note: access to the Retail Properties does not rely on elevator service because
the structures are no higher than two stories.) The Plan contains ten phases as
follows:
Estimated Estimated
Phase Description Start Date Completion Date
1. Educate senior management Commenced Completed
2. Designate a Plan manager Commenced Completed
3. Inventory all systems Commenced Completed
4. Contact suppliers of system Commenced Completed
5. Send questionnaire to tenan All have been mailed Currently
receiving responses
6. Send questionnaire to other
critical trading partners Commenced Substantially
completed, awaiting
some responses
7. Prioritize problems
(critical vs. non-critical) Commenced Completed
8. Identify solutions (repair or
replace) Commenced Completed
9. Test Solutions Commenced Substantially
completed
10. Anticipate contingencies
including the most reasonably
likely worst case scenarios Commenced Continuous
The Company has incurred approximately $75 to date in the
implementation of the Plan. These costs have primarily been incurred to upgrade
the desktop PC's at the Company's home office. The Company has determined that
implementing the Plan will cost less than $100. The Company has incurred
approximately $340 to date and anticipates an additional $160 to replace its
current accounting and property management software system. Although the Company
believes that the current system is materially Year 2000 compliant, the Company
has decided to migrate to a new system because of the improved technology and
reporting capabilities of the new system. The Company successfully converted
to the new system on October 1, 1999. These costs will be funded from the
Company's cash flow. The Plan efforts will be primarily staffed by employees of
the Company.
12
<PAGE>
The most reasonably likely worst case scenario is that the Company's
tenants are delayed in generating their rental payments due to their own Year
2000 IT problems. If this occurs the Company's property managers will attempt to
accelerate rental payments by requesting manual checks by personally visiting
the tenants or by contacting the appropriate personnel at the tenants' accounts
payable departments. Also, the Company will have available its Lines of Credit
to fund immediate cash flow needs if such delay occurs.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or if assessment, remediation and testing
are not effected timely or accurately with respect to Year 2000 issues that are
identified, there can be no assurance that the Year 2000 issue will not
materially adversely affect the Company's results of operations. Also, there can
be no assurance that the Year 2000 issues of the Company's suppliers, vendors,
tenants and other important trading partners will not have a material adverse
impact on the Company's business or results of operations.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the dates on which the Company believes it
will complete such efforts are based upon management's best estimates, which
were derived using numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of relevant computer
codes and embedded technology, and similar uncertainties. Although some of the
Company's agreements with suppliers and contractors contain provisions requiring
such parties to indemnify the Company under some circumstances, there can be no
assurance that such indemnification agreements will cover all of the Company's
liabilities and costs related to claims by third parties related to the Year
2000 issue.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
The Company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates. Interest rate fluctuations are
monitored by management as an integral part of the Company's overall risk
management program, which recognizes the unpredictability of financial markets
and seeks to reduce the potentially adverse effect on the Company's results. Our
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower our overall borrowing costs. To
achieve these objectives, from time to time we enter into interest rate hedge
contracts such as swap and cap agreements in order to mitigate our interest rate
risk with respect to various debt instruments. We do not hold or issue these
derivative contracts for trading or speculative purposes. The effect of interest
rate fluctuations historically has been small relative to other factors
affecting operating results, such as rental rates and occupancy.
The Company's operating results are affected by changes in interest
rates on variable rate borrowings including the Company's Line of Credit
facilities as well as other mortgages and notes with variable interest rates. If
interest rates increased by 100 basis points, the Company's interest expense for
the nine months ended September 30, 1999 would have increased by $222, based on
balances during the nine months ending September 30, 1999. The following is a
summary of the Company's long term debt as of September 30, 1999:
13
<PAGE>
<TABLE>
<S>
Expected Maturity Date of Balloon Payments
<C> <C> <C> <C> <C>
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
<C>
FIXED RATE $3,656 $24,367 $735 $11,843 $14,926
- -----------
Average Interest Rate 7.0% 8.4% 6.5% 7.1% 7.2%
VARIABLE RATE
LIBOR-based(1):
Line of Credit (LIBOR
plus 1.0%) (2) 13,000
Ashburn Farms (LIBOR
plus 1.5%) 6,451
-------- -------- -------- -------- --------
Total LIBOR-based 0 0 19,451 0 0
Tax-exempt:
Mayfair Shopping
Center (3)
-------- -------- -------- -------- --------
Total variable rate debt 0 0 19,451 0 0
-------- -------- -------- -------- --------
Total Debt $3,656 $24,367 $20,186 $11,843 $14,926
====================================================
<C> <C> <C>
Total Fair Value
Balloon of Debt as of
Thereafter Payments 9/30/99
---------- -------- -------------
$138,456 $193,983 $311,733
7.6% 7.6%
13,000 13,000
6,451 6,451
-------- --------
0 19,451 19,451
3,235 3,235 3,235
-------- -------- --------
3,235 22,686 22,686
-------- -------- --------
$141,691 $216,669 $334,419
===========================================
</TABLE>
(1) At September 30, 1999 the LIBOR rate was 5.40%.
(2) This schedule assumes that the Line of Credit is repaid at the maturity
date. Management believes that the line will be renewed at maturity
under similar terms.
(3) The interest rate is determined weekly at the rate necessary to produce
a bid in the process of remarketing the obligation equal to par plus
accrued interest. The Company also pays a 1.5% letter of credit
enhancement fee to Mellon Bank.
Currently the Company has only one interest rate swap contract in effect.
The notional amount is $24,000, the contract period is May 1, 2000 through May
2, 2005. The Company pays a fixed rate of 5.85% and receives the 30 day LIBOR
rate. As of September 30, 1999, this swap contract has a fair market value of
approximately $619. If interest rates increase by 100 basis points, the fair
market value of this interest rate hedge contract as of September 30, 1999 would
increase by approximately $904. If interest rates decrease by 100 basis points,
the fair market value of this interest rate hedge contract as of September 30,
1999 would decrease by approximately $962. In addition, we are exposed to
certain losses in the event of non-performance by the counter party under the
hedge contract. We expect the counter party, which is a major financial
institution, to perform fully under this contract. However, if the counter party
were to default on their obligations under the interest rate hedge contract, we
could be required to pay the full rates on our debt, even if such rates were in
excess of the rates in the contract.
14
<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,
1998:
Date of Sale Title Amount
------------ ----- ------
8/17/99 Common Units 103,795
(b) Underwriters and other purchasers
I. August 17, 1999 Sales. Underwriters were not retained
in connection with the sale of these securities. These
units were sold to the seller of Newark Shopping
Center, an "accredited investor".
(c) Consideration
I. August 17, 1999 Sales. These units were issued in
exchange for property having a value of approximately
$2.8 million, net of assumed indebtedness. There were
no underwriting discounts or commissions with respect
to such securities.
Item 4. Submission of matters to a vote of security holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
- -----------------------------------------------------------------------
(b) Reports on Form 8-K.
An interim report on Form 8-K was filed on March 10, 1999 reporting the
acquisition of two retail properties.
Three interim reports on Form 8-K were filed on March 24, 1999
including certain exhibits thereto.
An interim report on Form 8-K was filed on March 24, 1999 regarding
Risk Factors.
15
<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: November 10, 1999 /s/ William J. Wolfe
----------------------------------
By: William J. Wolfe
President and
Chief Executive Officer
Date: November 10, 1999 /s/ James G. Blumenthal
----------------------------------
By: James G. Blumenthal
Executive Vice President and
Chief Financial Officer
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,629
<SECURITIES> 0
<RECEIVABLES> 10,735
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 587,610
<DEPRECIATION> 63,636
<TOTAL-ASSETS> 556,171
<CURRENT-LIABILITIES> 0
<BONDS> 281,982
0
27
<COMMON> 95
<OTHER-SE> 245,333
<TOTAL-LIABILITY-AND-EQUITY> 556,171
<SALES> 0
<TOTAL-REVENUES> 64,188
<CGS> 0
<TOTAL-COSTS> 43,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,066
<INCOME-PRETAX> 8,259
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,259
<EPS-BASIC> .93
<EPS-DILUTED> .91
</TABLE>
