SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NO. 1-6622
------------- ------
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 53-0261100
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
6110 EXECUTIVE BOULEVARD, ROCKVILLE, MARYLAND 20852
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (301) 984-9400
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the close of the period covered by this report.
SHARES OF BENEFICIAL INTEREST 35,733,793
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 twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
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1
WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
Page
----
Part I: Financial Information
---------------------
Item l. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 14
Part II: Other Information
-----------------
Item l. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
Part I
FINANCIAL INFORMATION
---------------------
The information furnished in the accompanying Consolidated Balance Sheets,
Statements of Income, Statements of Cash Flows and Statement of Changes in
Shareholders' Equity reflect all adjustments, consisting of normal recurring
items, which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and of cash flows
for the interim periods. The accompanying financial statements and notes
thereto should be read in conjunction with the financial statements and notes
for the three years ended December 31, 1999 included in the Trust's 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
2
Part I
Item I. Financial Statements
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share amounts)
(Unaudited)
June 30, December 31,
2000 1999
------------- ------------
Assets
Real estate at cost $676,724 $661,870
Accumulated depreciation (92,941) (83,574)
------------- ------------
Total investment in real estate 583,783 578,296
Cash and temporary investments 8,983 4,716
Rents and other receivables, net of allowance for doubtful
accounts of $1,555 and $863, respectively 6,700 6,572
Prepaid expenses and other assets 17,342 18,896
------------- ------------
$616,808 $608,480
============= ============
Liabilities
Accounts payable and other liabilities $14,051 $11,421
Tenant security deposits 5,477 5,006
Advance rents 2,455 3,304
Mortgage notes payable 86,660 87,038
Lines of credit payable 40,000 33,000
Notes payable 210,000 210,000
------------- ------------
358,643 349,769
------------- ------------
Minority interest 1,540 1,522
------------- ------------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000,000
shares authorized: 35,734 and 35,721 shares issued
and outstanding at June 30, 2000 and December 31,
1999, respectively 357 357
Additional paid-in capital 256,268 256,832
------------- ------------
256,625 257,189
------------- ------------
$616,808 $608,480
============= ============
See accompanying notes to financial statements
3
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
Real estate rental revenue $33,350 $28,864 $65,285 $56,518
Real estate expenses (9,633) (8,595) (19,005) (17,100)
--------- --------- --------- ---------
Operating income 23,717 20,269 46,280 39,418
Depreciation and amortization (5,624) (4,644) (11,054) (9,095)
--------- --------- --------- ---------
Income from real estate 18,093 15,625 35,226 30,323
Other income 242 232 391 437
Interest expense (6,311) (5,386) (12,401) (10,607)
General and administrative (2,061) (1,706) (3,842) (2,939)
--------- --------- --------- ---------
Income before gain on sale of real estate 9,963 8,765 19,374 17,214
--------- --------- --------- ---------
Gain on sale of real estate - - 1,498 7,909
--------- --------- --------- ---------
Net Income $9,963 $8,765 $20,872 $25,123
========= ========= ========= =========
Per share information based on the
weighted average number
of shares outstanding
Shares-- Basic 35,734 35,710 35,734 35,709
Shares-- Diluted 35,810 35,732 35,810 35,730
Net income per share-- Basic $0.28 $0.25 $0.58 $0.70
========= ========= ========= =========
Net income per share-- Diluted $0.28 $0.25 $0.58 $0.70
========= ========= ========= =========
Dividends paid $0.3125 $0.2925 $0.6050 $0.5725
========= ========= ========= =========
See accompanying notes to financial statements
4
WASHINGTON REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In Thousands)
(Unaudited)
Additional Shareholders'
Shares Par Value Paid in Capital Equity
------ --------- --------------- -------------
Balance, December 31, 1999 35,721 $357 $256,832 $257,189
Net income 20,872 20,872
Dividends (21,619) (21,619)
Share Grants 13 - 183 183
------ ------- -------- --------
Balance, June 30, 2000 35,734 $357 $256,268 $256,625
====== ======= ======== ========
See accompanying notes to financial statements
5
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
2000 1999
---------- --------
Cash Flow From Operating Activities
Net income $20,872 $25,123
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (1,498) (7,909)
Depreciation and amortization 11,054 9,095
Changes in other assets 1,027 933
Changes in other liabilities 2,269 596
---------- --------
Net cash provided by operating activities 33,724 27,838
---------- --------
Cash Flow From Investing Activities
Capital improvements to real estate (7,757) (8,524)
Non-real estate capital improvements (150) (129)
Real estate acquisitions (9,193) (41,879)
Cash received from sale of real estate 2,457 22,033
---------- --------
Net cash used in investing activities (14,643) (28,499)
---------- --------
Cash Flow From Financing Activities
Dividends paid (21,619) (20,444)
Borrowings - Lines of credit 7,000 22,000
Repayments - Lines of credit - -
Principal payments - Mortgage note payable (378) (270)
Share options exercised 183 100
---------- --------
Net cash (used) provided by financing activities (14,814) 1,386
---------- --------
Net increase in cash and temporary investments 4,267 725
Cash and cash equivalents at beginning of year 4,716 4,595
---------- --------
Cash and cash equivalents at end of period $8,983 $5,320
========== ========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the first six months for interest $11,981 $10,068
========== ========
See accompanying notes to financial statements
6
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1: NATURE OF BUSINESS
- --------------------------
Washington Real Estate Investment Trust ("WRIT") is a self-administered, self
managed qualified equity real estate investment trust, successor to a trust
organized in 1960. The Trust's business consists of the ownership of income-
producing real estate properties in the greater Washington - Baltimore Region.
WRIT operates in a manner intended to enable it to qualify as a real estate
investment trust under the Internal Revenue Code (the "Code"). In accordance
with the Code, a trust which distributes its capital gains and at least 95% of
its taxable income to its shareholders each year, and which meets certain other
conditions, will not be taxed on that portion of its taxable income which is
distributed to its shareholders. Accordingly, no provision for Federal income
taxes is required.
NOTE 2: ACCOUNTING POLICIES
- ---------------------------
Basis of Presentation
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
WRIT believes that the disclosures made are adequate to make the information
presented not misleading.
Comprehensive Income
WRIT has no items of comprehensive income that would require separate reporting
in the accompanying consolidated statements of income.
Earnings Per Common Share
"Basic earnings per share" is computed as net income divided by the weighted
average common shares outstanding. "Diluted earnings per share" is computed as
net income divided by the total weighted average common shares outstanding plus
the effect of dilutive common equivalent shares outstanding for the period.
Dilutive common equivalent shares reflect the assumed issuance of additional
common shares pursuant to certain of WRIT's share based compensation plans that
could potentially reduce or "dilute" earnings per share, based on the treasury
stock method.
New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement (as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133) establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a
7
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure to a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a foreign-currency-
denominated forecasted transaction. This statement is effective for all fiscal
quarters of fiscal years beginning after January 1, 2001. Although WRIT
currently has no derivative instruments, this statement could affect derivative
instruments acquired by WRIT in future periods.
Revenue Recognition
Residential properties are leased under operating leases with terms of generally
one year or less, and commercial properties are leased under operating leases
with average terms of three to five years. WRIT recognizes rental income and
rental abatements from its residential and commercial leases when earned in
accordance with SFAS No. 13. WRIT records an allowance for doubtful accounts
equal to the estimated uncollectible amounts. This estimate is based on WRIT's
historical experience and a review of the current status of its receivables.
Deferred Financing Costs
Costs associated with the issuance of notes payable are capitalized and
amortized using the effective interest rate method over the term of the related
notes.
Real Estate and Depreciation
Buildings are depreciated on a straight-line basis over estimated useful lives
not exceeding 50 years. Effective January 1, 1995, WRIT revised its estimate
of useful lives for major capital improvements to real estate. All capital
improvement expenditures associated with replacements, improvements, or major
repairs to real property are depreciated using the straight-line method over
their estimated useful lives ranging from 3 to 30 years. All tenant
improvements are amortized using the straight-line method over 5 years or the
term of the lease if it differs significantly from 5 years. Capital
improvements placed in service prior to January 1, 1995 will continue to be
depreciated on a straight-line basis over their previously estimated useful
lives not exceeding 30 years. Maintenance and repair costs are charged to
expense as incurred.
WRIT recognizes impairment losses on long-lived assets used in operations when
indicators of impairment are present and the net undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Impairment is generally assessed through comparison of amortized value
to fair value. No such losses have been recorded during 2000 or 1999.
Cash and Cash Equivalents
Cash and cash equivalents include investments readily convertible to known
amounts of cash with original maturities of 90 days or less.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts
8
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 3: REAL ESTATE INVESTMENTS
- -------------------------------
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C. and Virginia as follows:
June 30, 2000
(in thousands)
---------------
Office buildings $363,777
Industrial distribution centers 115,404
Apartment buildings 100,686
Shopping centers 96,857
--------
$676,724
========
WRIT acquired the following properties during 2000:
Acquisition Date Property Property Rentable Square Feet Acquisition Cost
Name Type (in thousands)
- --------------------------------------------------------------------------------------------------------------------
February 29, 2000 833 South Washington Street Retail 6,000 $1,350
May 5, 2000 962 Wayne Plaza Office 91,000 $7,700
NOTE 4: MORTGAGE NOTES PAYABLE
- -------------------------------
On September 20, 1999, WRIT assumed an $8.7 million mortgage note payable as
partial consideration for its acquisition of Avondale Apartments. The mortgage
bears interest at 7.875 percent per annum. Principal and interest are payable
monthly until November 1, 2005, at which time all unpaid principal and interest
are payable in full.
On September 27, 1999, WRIT executed a $50.0 million mortgage note payable
secured by the Ashby Apartments, Country Club Towers, Munson Hill Towers, Park
Adams and Roosevelt Towers. The mortgage bears interest at a fixed 7.14 percent
per annum and is payable monthly until October 1, 2009, at which time all unpaid
principal and interest are payable in full. The funds were used to repay
advances on its lines of credit.
Annual maturities of principal as of June 30, 2000 are as follows:
9
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(in thousands)
2000 $ 391
2001 833
2002 902
2003 7,376
2004 820
Thereafter 76,337
--------
Total $86,660
========
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of June 30, 2000, WRIT had two unsecured credit commitments in the amount of
$50 million and $25 million, with $40 million outstanding under the credit
commitments leaving $35 million available. Under the terms of the credit
commitments, interest only is payable monthly, in arrears, on the unpaid
principal balance. Amounts outstanding under the credit commitments during the
three months ended June 30, 2000 bore interest at rates ranging from 6.64
percent to 7.81 percent per annum. All new advances will bear interest at LIBOR
plus a spread based on WRIT's credit rating on its publicly issued debt. All
unpaid interest and principal can be prepaid prior to the expiration of WRIT's
interest rate lock-in periods. This prepayment is not subject to a yield
maintenance obligation or other penalty on the $50 million credit commitment but
is subject to a yield maintenance obligation on the $25 million credit
commitment.
The $50 million credit commitment requires WRIT to pay the lender unused
commitment fees at the rate of 0.200 percent per annum on the amount by which
the unused portion of the commitment exceeds the balance of outstanding advances
and term loans. The $25 million credit commitment requires WRIT to pay the
lender a facility management fee of 0.175 percent per annum on the commitment
amount of $25 million. These fees are payable quarterly. The credit
commitments also contain certain financial covenants related to debt, net worth,
and cash flow as well as non-financial covenants, all of which WRIT has met as
of June 30, 2000.
NOTE 6: NOTES PAYABLE
- ---------------------
On August 13, 1996 WRIT sold $50 million of 7.125 percent 7-year unsecured notes
due August 13, 2003, and $50 million of 7.25 percent unsecured 10-year notes due
August 13, 2006. The 7-year notes were sold at 99.107 percent of par and the
10-year notes were sold at 98.166 percent of par. Net proceeds to the Trust
after deducting underwriting expenses were $97.6 million. The 7-year notes bear
an effective interest rate of 7.46 percent, and the 10-year notes bear an
effective interest rate of 7.49 percent, for a combined effective interest rate
of 7.47 percent. WRIT used the proceeds of these notes to repay advances on its
lines of credit and to finance acquisitions and capital improvements to its
properties.
On February 20, 1998, WRIT sold $50 million of 7.25 percent unsecured notes due
February 25, 2028 at 98.653 percent to yield approximately 7.36 percent. WRIT
also sold $60 million in unsecured Mandatory Par Put Remarketed Securities
("MOPPRS") at an effective borrowing rate through the remarketing date (February
2008) of approximately 6.74 percent. The net proceeds to WRIT after deducting
loan origination fees was $102.7 million. WRIT used the proceeds of these notes
for general business purposes, including repayment of outstanding advances under
its lines of credit and to finance acquisitions and capital improvements to its
properties. WRIT's costs of the borrowings of approximately $7.2 million will
be amortized over the lives of the notes using the effective interest method.
These notes contain certain financial and non-financial covenants, all of which
WRIT has met as of June 30, 2000.
10
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 7: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Distribution
Centers, Apartment Buildings and Shopping Centers. Office Buildings represent
52 percent of real estate rental revenue and provide office space for various
types of businesses. Industrial Distribution Centers represent 15 percent of
real estate rental revenue and are used for warehousing and distribution.
Apartment Buildings represent 19 percent of real estate rental revenue. These
properties provide housing for families throughout the Washington Metropolitan
area. Shopping Centers represent the remaining 14 percent of real estate rental
revenue and are typically grocery store or drug store anchored centers and
retail outlets for a variety of stores.
The accounting policies of the segments are the same as those described in Note
2. WRIT evaluates performance based upon operating income from the combined
properties in each segment. WRIT's reportable segments are consolidations of
similar properties. They are managed separately because each segment requires
different operating, pricing and leasing strategies. All of these properties
have been acquired separately and are incorporated into the applicable segment.
11
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(in thousands)
--------------
Three Months Ended June 30, 2000
--------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
----------------------------------------------------------------------------------------------
Real estate rental revenue $ 17,399 $ 4,899 $ 6,462 $ 4,590 $ - $ 33,350
Real estate expenses (5,296) (956) (2,375) (1,006) - (9,633)
----------------------------------------------------------------------------------------------
Operating income 12,103 3,943 4,087 3,584 - 23,717
Depreciation and amortization (3,192) (959) (855) (618) - (5,624)
----------------------------------------------------------------------------------------------
Income from real estate 8,911 2,984 3,232 2,966 - 18,093
Other income - - - - 242 242
Interest expense (409) - (1,083) (160) (4,659) (6,311)
General and administrative - - - - (2,061) (2,061)
----------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 8,502 $ 2,984 $ 2,149 $ 2,806 $(6,478) $ 9,963
==============================================================================================
Capital investments $ 9,177 $ 925 $ 1,043 $ 288 $ 50 $ 11,483
==============================================================================================
Total assets $327,102 $105,703 $79,023 $83,233 $21,747 $616,808
==============================================================================================
(in thousands)
--------------
Three Months Ended June 30, 1999
--------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
-------------------------------------------------------------------------------------------------
Real estate rental revenue $ 14,845 $ 3,914 $ 5,489 $ 4,616 $ - $ 28,864
Real estate expenses (4,578) (865) (2,079) (1,073) - (8,595)
------------------------------------------------------------------------------------------------
Operating income 10,267 3,049 3,410 3,543 - 20,269
Depreciation and amortization (2,606) (814) (664) (560) - (4,644)
------------------------------------------------------------------------------------------------
Income from real estate 7,661 2,235 2,746 2,983 - 15,625
Other income - - - - 232 232
Interest expense (413) - - (164) (4,809) (5,386)
General and administrative - - - - (1,706) (1,706)
------------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 7,248 $ 2,235 $ 2,746 $ 2,819 $(6,283) $ 8,765
================================================================================================
Capital investments $ 29,286 $ 8,113 $ 621 $ 116 $ 90 $ 38,226
================================================================================================
Total assets $314,150 $102,772 $65,538 $84,217 $19,134 $585,811
================================================================================================
12
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(in thousands)
--------------
Six Months Ended June 30, 2000
------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
-------------------------------------------------------------------------------------------------
Real estate rental revenue $ 34,094 $ 9,214 $12,863 $ 9,114 $ - $ 65,285
Real estate expenses (10,256) (1,972) (4,708) (2,068) - (19,005)
-------------------------------------------------------------------------------------------------
Operating income 23,838 7,242 8,155 7,046 - 46,280
Depreciation and amortization (6,262) (1,869) (1,700) (1,223) - (11,054)
-------------------------------------------------------------------------------------------------
Income from real estate 17,576 5,373 6,455 5,823 - 35,226
Other income - - - - 391 391
Interest expense (752) - (2,166) (321) (9,162) (12,401)
General and administrative - - - - (3,842) (3,842)
-------------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 16,824 $ 5,373 $ 4,289 $ 5,502 $(12,613) $ 19,374
=================================================================================================
Capital investments $ 11,616 $ 1,818 $ 1,602 $ 1,905 $ 184 $ 17,125
=================================================================================================
(in thousands)
--------------
Six Months Ended June 30, 1999
------------------------------
Office Industrial Apartment Shopping Corporate
Buildings Centers Buildings Centers and Other Consolidated
-------------------------------------------------------------------------------------------------
Real estate rental revenue $28,847 $ 7,742 $10,887 $ 9,042 $ - $ 56,518
Real estate expenses (9,095) (1,759) (4,153) (2,093) - (17,100)
------------------------------------------------------------------------------------------------
Operating income 19,752 5,983 6,734 6,949 - 39,418
Depreciation and amortization (5,123) (1,560) (1,317) (1,095) - (9,095)
------------------------------------------------------------------------------------------------
Income from real estate 14,629 4,423 5,417 5,854 - 30,323
Other income - - - - 437 437
Interest expense (827) - - (328) (9,452) (10,607)
General and administrative - - - - (2,939) (2,939)
------------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $13,802 $ 4,423 $ 5,417 $ 5,526 $(11,954) $ 17,214
================================================================================================
Capital investments $32,171 $15,825 $ 1,259 $ 1,148 $ 129 $ 50,532
================================================================================================
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
FORWARD LOOKING STATEMENTS
- --------------------------
WRIT's Management's Discussion and Analysis of Financial Condition and Results
of Operations contains statements that may be considered forward looking.
Although WRIT believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Factors that could cause actual results to
differ materially from WRIT's current expectations include general economic
conditions, capital market conditions, local real estate conditions, the
performance of properties that WRIT has acquired or may acquire and other risks,
detailed from time to time in WRIT's past and future SEC reports.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Three Months Ended June 30,
- ----------------------------------------------------------------------------
2000 Compared to the Three Months Ended June 30, 1999
- -----------------------------------------------------
Total revenues for the second quarter of 2000 increased 15.5% ($4.5 million) to
$33.4 million from $28.9 million in the second quarter of 1999. Operating
income increased 17.0% ($3.4 million) to $23.7 million from $20.3 million in the
second quarter of 1999.
For the second quarter of 2000, WRIT's office buildings had increases of 17.2%
in revenues and 17.9% in operating income, over the second quarter of 1999.
These increases were primarily due to the acquisitions of 600 Jefferson Plaza
and 1700 Research Boulevard in May 1999, the acquisition of Parklawn Plaza in
November 1999, the acquisition of Wayne Plaza in May 2000 and increased core
portfolio operating income. Comparing those office buildings owned by WRIT for
the entire second quarter of 1999 and 2000, revenue and operating income
increased 5.0% and 7.3%, respectively. These increases in revenues and
operating income were primarily due to increases in rental rates, antenna rents
and tenant pass through expense recoveries across the sector, offset by a slight
decrease in occupancy from 98.2% to 97.1%.
For the second quarter of 2000, WRIT's industrial distribution center revenues
and operating income increased 25.2% and 29.3%, respectively, over the second
quarter of 1999. These increases were primarily due to the acquisitions of
Sully Square in April 1999, and Amvax in September 1999, and due to increased
core portfolio operating income. Comparing those industrial distribution
centers owned by WRIT for the entire second quarter of 1999 and 2000, revenue
and operating income increased by 6.5% and 7.0%, respectively. These increases
in revenues and operating income were primarily due to increased rental rates
and occupancy. Occupancy rates improved to 96.3% in the second quarter of 2000
from 94.3% in the second quarter of 1999.
For the second quarter of 2000, WRIT's apartment revenues and operating income
increased 17.7% and 19.9%, respectively, over the second quarter of 1999. These
increases were primarily due to the acquisition of Avondale Apartments in
September 1999 and increased rental and occupancy rates in WRIT's core
portfolio. Comparing those apartment buildings owned by WRIT for the entire
second quarter of 1999 and 2000, revenue and operating income increased by 7.2%
and 10.3%, respectively. These increases in revenues and operating income were
primarily due to increased rental rates and occupancy. Occupancy rates
increased from 95.9% in the second quarter of 1999 to 97.6% in the second
quarter of 2000.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the second quarter of 2000, WRIT's shopping center revenues decreased 0.6%
and operating income increased 1.2%, respectively, over the second quarter of
1999. Revenue decreased due to the sale of Prince William Plaza in February
2000. Operating income increased primarily due to increased core portfolio
revenues and operating income, offset by the February 2000 sale of Prince
William Plaza. Comparing those shopping centers owned by WRIT for the entire
second quarter of 1999 and 2000, revenue and operating income increased by 0.3%
and 4.8%, respectively. These increases were primarily due to increased rental
rates offset by a decline in occupancy rates.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Six Months Ended June 30, 2000
- -------------------------------------------------------------------------------
Compared to the Six Months Ended June 30, 1999
- ----------------------------------------------
Total revenues for the first six months of 2000 increased 15.5% ($8.8 million)
to $65.3 million from $56.5 million for the first six months of 1999. Operating
income increased 17.4% ($6.9 million) to $46.3 million for the first six months
of 2000 from $39.4 million for the first six months of 1999.
For the first six months of 2000, WRIT's office buildings had increases of 18.2%
in revenues and 20.7% in operating income, over the first six months of 1999.
These increases were primarily due to the acquisitions of 600 Jefferson Plaza
and 1700 Research Boulevard in May 1999, Parklawn Plaza in November 1999 and
Wayne Plaza in May 2000 and increased core portfolio operating income.
Comparing those office buildings owned by WRIT for the entire first six months
of 1999 and 2000, revenue and operating income increased 9.9% and 12.5%,
respectively. These increases in revenues and operating income were primarily
due to increases in rental rates, antenna rents and tenant pass through expense
recoveries across the sector. Operating income was partially offset by an
increase of $1.2 million (12.8%) in real estate expenses in the first six months
of 2000.
For the first six months of 2000, WRIT's industrial distribution center revenues
and operating income increased 19.0% and 21.0%, respectively, over the first six
months of 1999. This was primarily due to the acquisitions of Sully Square in
April 1999 and Amvax in September 1999 and due to increased core portfolio
operating income. Comparing those industrial distribution centers owned by WRIT
for the entire first six months of 1999 and 2000, revenue and operating income
increased by 12.4% and 13.2%, respectively. These increases in revenues and
operating income were primarily due to increased rental rates, occupancy levels
and tenant pass through expense recoveries. Operating income was partially
offset by an increase of $0.2 million (12.1%) in real estate expenses in the
first six months of 2000.
For the first six months of 2000, WRIT's apartment revenues and operating income
increased 18.2% and 21.1%, respectively, over the first six months of 1999.
These increases were primarily due to the acquisition of Avondale Apartments in
September 1999 and increased rental and occupancy rates. Comparing those
residential properties owned by WRIT for the entire first six months of 1999 and
2000, revenue and operating income increased by 7.8% and 14.1%, respectively.
Operating income was partially offset by an increase of $0.6 million (13.4%) in
real estate expenses in the first six months of 2000.
For the first six months of 2000, WRIT's shopping center revenues increased
0.8% and operating income increased 1.4%, respectively, over the first six
months of 1999. The slight revenue increase was due to the sale of Prince
William Plaza in February 2000, while the increase in operating income primarily
resulted from increased core portfolio revenues. Comparing those shopping
centers owned by WRIT for the entire first six months of 1999 and 2000, revenue
and operating income increased by 1.8% and 2.9%, respectively. These increases
were primarily due to increased rental rates and increased tenant pass through
expense recoveries. Operating income also increased due to a $0.1 million
decrease (2.8%) in real estate expenses in the first six months of 2000.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended June 30,
- -------------------------------------------------------------------------------
2000 Compared to the Three Months Ended June 30, 1999
- -----------------------------------------------------
Real estate expenses increased $1.0 million or 12.1% to $9.6 million for the
second quarter of 2000 as compared to $8.6 million for the second quarter of
1999. This increase was primarily due to expenses relating to $70.9 million of
properties acquired in 1999 and 2000 partially offset by the impact of the $25.9
million of properties sold in 1999 and 2000, higher tax rates and a 3.3%
increase in core portfolio operating expense.
Depreciation and amortization expense increased $1.0 million or 22.0% to $5.6
million for the second quarter of 2000 as compared to $4.6 million for the
second quarter of 1999. This was primarily due to 1999 and year to date 2000
acquisitions of $61.8 million and $9.1 million, respectively, and 1999 and year
to date 2000 capital and tenant improvement expenditures which totaled $17.7
million and $7.9 million, respectively. The amount was partially offset by 1999
and year to date 2000 dispositions of $23.1 million and $2.8 million,
respectively.
Total interest expense was $6.3 million for the second quarter of 2000 as
compared to $5.4 million for the second quarter of 1999. This increase was
primarily attributable to a $50.0 million mortgage note payable executed in
September 1999 and secured by the Ashby Apartments, Country Club Towers, Munson
Hill Towers, Park Adams and Roosevelt Towers. The increase was also due to the
assumption of an $8.7 million mortgage in September 1999. For the second
quarter of 2000, notes payable interest expense was $3.9 million, mortgage
interest expense was $1.7 million and lines of credit interest expense was $0.7
million. For the second quarter of 1999, notes payable interest expense was
$3.9 million, lines of credit interest expense was $0.9 million and mortgage
interest expense was $0.6 million.
General and administrative expenses increased $0.4 million to $2.1 million for
the second quarter of 2000 as compared to $1.7 million for the second quarter of
1999. The change was primarily attributable to increased salaries, incentive
compensation and professional fees. For the second quarter of 2000, general and
administrative expenses as a percentage of revenue were 6.2% as compared to 5.9%
for the second quarter of 1999.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Six Months Ended June 30,
- -----------------------------------------------------------------------------
2000 Compared to the Six Months Ended June 30, 1999
- ---------------------------------------------------
Real estate expenses increased $1.9 million or 10.9% to $19.0 million for the
first six months of 2000 as compared to $17.1 million for the first six months
of 1999. This increase was primarily due to expenses relating to properties
acquired in 1999 and 2000 as well as increased core portfolio utilities, repairs
and maintenance, operating services and common area maintenance expenses in 2000
as compared to 1999. This increase was also due to more severe weather
conditions in the first quarter of 2000 partially offset by the impact of the
properties sold in 1999 and 2000.
Depreciation and amortization expense increased $2.0 million or 21.5% to $11.1
million for the first six months of 2000 as compared to $9.1 million for the
first six months of 1999. This was primarily due to 1999 and year to date 2000
acquisitions of $61.8 million and $9.1 million, respectively, and 1999 and year
to date 2000 capital and tenant improvement expenditures which totaled $17.7
million and $7.9 million, respectively.
Total interest expense was $12.4 million for the first six months of 2000 as
compared to $10.6 million for the
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
second quarter of 1999. This increase was primarily attributable to a $50.0
million mortgage note payable executed in September 1999 and secured by the
Ashby Apartments, Country Club Towers, Munson Hill Towers, Park Adams and
Roosevelt Towers. The increase was also due to the assumption of an $8.7 million
mortgage in September 1999 and higher interest rates on the average balance
outstanding on the lines of credit payable. For the first six months of 2000,
notes payable interest expense was $7.9 million, mortgage interest expense was
$3.2 million and lines of credit interest expense was $1.3 million. For the
first six months of 1999, notes payable interest expense was $7.9 million, lines
of credit interest expense was $1.6 million and mortgage interest expense was
$1.1 million.
General and administrative expenses increased $0.9 million to $3.8 million for
the first six months of 2000 as compared to $2.9 million for the first six
months of 1999. The change was primarily attributable to increased salaries,
incentive compensation and professional fees. For the first six months of 2000,
general and administrative expenses as a percentage of revenue were 5.9% as
compared to 5.2% for the first six months of 1999.
Gain on sale of real estate for the six months ended June 30, 2000 was $1.5
million, resulting from the sale of Prince William Plaza. Gain on sale of real
estate for the six months ended June 30, 1999 was $7.9 million, resulting from
the sale of 444 N. Frederick Road, Arlington Financial Center, Department of
Commerce and V Street Distribution Center.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
WRIT has utilized the proceeds of share offerings, medium and long-term fixed
interest rate debt, bank lines of credit and cash flow from operations for its
capital needs. External sources of capital are available to WRIT from its
existing unsecured credit commitments and management believes that additional
sources of capital are available from the sale of additional shares, the sale of
medium or long-term notes and/or through secured financing. The funds raised
would be used to pay off any outstanding advances on the Trust's lines of credit
and/or for new acquisitions and capital improvements.
WRIT anticipates that over the near term, recent and future interest rate
increases will not have a material effect on earnings. WRIT's long-term fixed-
rate notes payable have maturities ranging from August 2003 through February
2028 (see Note 5 for further discussion). Only $40 million (all from unsecured
lines of credit payable) of the $336.7 million total debt outstanding at June
30, 2000 was at a floating rate. WRIT estimates that a 200 basis point increase
in interest rates would result in less than a 1.5% reduction in earnings.
WRIT has line of credit commitments in place from commercial banks for up to $75
million which bear interest at an adjustable spread over LIBOR based on the
Trust's interest coverage ratio and public debt rating. As of June 30, 2000,
WRIT had $40 million outstanding under its lines of credit. WRIT acquired seven
properties in 1999 and two properties in 2000 (as of June 30) for total
acquisition costs of $61.8 million and $9.1 million, respectively. The 1999
acquisitions were financed through line of credit advances, the use of the
proceeds from the property sales in February 1999 and the assumption of a
mortgage payable of $8.7 million. The 2000 acquisitions were financed through
proceeds from the sale of Prince William Plaza in February 2000 and line of
credit advances.
On September 27, 1999, WRIT closed on a $50.0 million mortgage note payable of
which the proceeds were used to pay down WRIT's unsecured lines of credit. The
mortgage is secured by five of WRIT's Virginia residential
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
properties.
Cash flow from operating activities totaled $33.7 million for the first six
months of 2000, as a result of net income before gain on sale of real estate of
$19.3 million, depreciation and amortization of $11.1 million, decreases in
other assets of $1.0 million and decreases in liabilities (other than mortgage
note, senior notes and lines of credit payable) of $2.3 million. The majority
of the increase in cash flow from operating activities was primarily due to a
larger property portfolio, increased rental rates and increased occupancies.
Net cash used in investing activities for the first six months of 2000 was $14.6
million, including real estate acquisitions of $9.2 million and capital
improvements to real estate of $7.8 million offset by cash received from sale of
real estate properties of $2.5 million.
Net cash used in financing activities for the first six months of 2000 was $14.8
million, including line of credit borrowings of $7.0 million, principal
repayments on the mortgage notes payable of $0.4 million and $21.6 million in
dividends paid. Rental revenue has been the principal source of funds to pay
WRIT's operating expenses, interest expense and dividends to shareholders.
Management believes that WRIT has the liquidity and the capital resources
necessary to meet all of its known obligations and to make additional property
acquisitions and capital improvements when appropriate to enhance long-term
growth.
RATIOS OF EARNINGS TO FIXED CHARGES AND DEBT SERVICE COVERAGE
- -------------------------------------------------------------
The following table sets forth the Trust's ratios of earnings to fixed charges
and debt service coverage for the periods shown:
Six months ended Year ended
June 30, 2000 December 31, 1999
---------------- -----------------
Earnings to fixed charges 2.56x 2.61x
Debt service coverage 3.35x 3.42x
Debt service coverage is computed by dividing income before gain on sale of real
estate, interest income, interest expense, depreciation and amortization by the
sum of interest expense plus mortgage principal amortization.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
The only material market risk to which WRIT is exposed is interest rate risk.
WRIT's exposure to market risk for changes in interest rates relates primarily
to refinancing long-term fixed rate obligations, the opportunity cost of fixed
rate obligations in a falling interest rate environment and its variable rate
lines of credit. WRIT primarily enters into debt obligations to support general
corporate purposes including acquisition of real estate properties, capital
improvements and working capital needs. In the past, WRIT has used interest
rate hedge agreements to hedge against rising interest rates in anticipation of
refinancing or new debt issuance.
WRIT's interest rate risk has not changed significantly from its risk as
disclosed in its 1999 Form 10-K.
YEAR 2000
- ---------
WRIT's Year 2000 Project completion resulted in no interruption or failure of
normal business activities or operations. No material failures or significant
interruptions were experienced that materially or adversely affected WRIT's
operations, liquidity or financial condition. The total costs incurred to
become Year 2000 compliant were not material to WRIT's financial position in
second quarter 2000 or second quarter 1999. Any future cost associated with
Year 2000 compliance is not expected to be material to WRIT's financial
position.
18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At WRIT's annual meeting of the shareholders on May 23, 2000, the following
members were elected to the Board of Trustees for a period of three years:
Affirmative Votes Negative Votes
-------------------------------------------------
Mr. John M. Derrick, Jr. 31,087,051 (98%) 582,953 (2%)
Mr. Charles T. Nason 31,084,326 (98%) 585,678 (2%)
Mr. Derrick was re-elected as Trustee and Mr. Nason was elected as
successor Trustee for Mr. Arthur A. Birney. Trustees whose term of office
continued after the meeting were Ms. Susan J. Williams, Mr. Edmund B.
Cronin, Jr., Mr. Clifford M. Kendall, Mr. John P. McDaniel and Mr. David M.
Osnos.
The shareholders approved an amendment to the WRIT Stock Option plan to
increase the number of shares available for option grants with 27,700,462
votes in favor (representing 87% of voting shares), 3,347,960 votes opposed
(representing 11% of voting shares) and 621,571 votes abstained (2% of
voting shares).
The shareholders did not approve a shareholder proposal regarding executive
compensation. The proposal received 3,988,509 votes in favor (representing
18% of voting shares), 16,186,971 votes against (75% of voting shares) and
1,420,450 votes abstained (7% of voting shares).
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Management contracts, plans and arrangements
(h) Dividend Equivalent Plan.
(i) Dividend Equivalent Right Agreement.
(12) Computation of Ratios
19
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. April 25, 2000 - Report pursuant to Item 5 on the release of the Trust's
March 31, 2000 earnings information.
2. July 25, 2000 - Report pursuant to Item 5 on the release of the Trust's
June 30, 2000 earnings information.
20
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.
WASHINGTON REAL ESTATE INVESTMENT TRUST
/s/Larry E. Finger
________________________________________________
Larry E. Finger,
Senior Vice President
and Chief Financial Officer
/s/Laura M. Franklin
________________________________________________
Laura M. Franklin,
Vice President,
Chief Accounting Officer and
Corporate Secretary
Date: August 11, 2000
21