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, 1997 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 incorporation (IRS Employer Identification or organization) Number) 10400 CONNECTICUT AVENUE, KENSINGTON, MARYLAND 20895 - ------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) Registrant's telephone number, including area code (301) 929-5900 - ------------------------------------------------------------------------------- (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 31,827,844 - ------------------------------------------------------------------------------- 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 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 Statements of Cash Flows 5 Consolidated Statement of Changes in Shareholders' 6 Equity Consolidated Notes to Financial Statements 7 Item 2 Management's Discussion and Analysis 11 Part II: Other Information Item l Legal Proceedings 15 Item 2 Changes in Securities 15 Item 3 Defaults upon Senior Securities 15 Item 4 Submission of Matters to a Vote of Security Holders 15 Item 5 Other Information 15 Item 6 Exhibits and Reports on Form 8-K 15 Signatures 16 Part I FINANCIAL INFORMATION The information furnished in the accompanying 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, 1996 included in the Trust's 1996 Form 10-K Report 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, 1997 1996 ----------- ----------- Assets Real estate at cost............................................ $372,962 $352,579 Accumulated depreciation....................................... (51,377) (46,639) -------- -------- 321,585 305,940 Mortgage note receivable....................................... 797 799 -------- -------- Total investment in real estate............................ 322,382 306,739 Cash and temporary investments................................. 1,897 1,676 Rents and other receivables, net of allowance for doubtful accounts of $834 and $534, respectively...................... 4,320 3,429 Prepaid expenses and other assets.............................. 6,219 6,644 -------- -------- $334,818 $318,488 -------- -------- -------- -------- Liabilities Accounts payable and other liabilities......................... $ 6,536 $ 5,954 Tenant security deposits....................................... 2,738 2,523 Advance rents.................................................. 1,723 1,798 Mortgage note payable.......................................... 7,527 7,590 Lines of credit payable........................................ 23,000 5,000 Senior notes payable........................................... 100,000 100,000 -------- -------- 141,524 122,865 -------- -------- Shareholders' Equity Shares of beneficial interest; $.01 par value; 100,000,000 shares authorized: 31,827,844 shares issued and outstanding.................................................. 318 318 Additional paid-in capital..................................... 192,976 195,305 --------- -------- 193,294 195,623 -------- -------- 334,818 318,488 -------- -------- -------- --------
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 Six Months Ended June 30, June 30, ------------------------ --------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Real estate rental revenue................ $ 19,104 $ 15,830 $ 37,602 $ 30,511 Real estate expenses...................... (6,185) (5,153) (12,132) (10,009) --------- --------- -------- -------- 12,919 10,677 25,470 20,502 Depreciation and amortization............. (2,557) (1,809) (4,987) (3,394) --------- -------- -------- -------- Income from real estate................... 10,362 8,869 20,483 17,108 Other income.............................. 157 113 227 234 Interest expense.......................... (2,379) (989) (4,586) (1,643) General and administrative................ (1,000) (910) (1,956) (1,664) --------- ------- -------- -------- Net Income................................ $ 7,140 $ 7,083 $14,168 $14,035 --------- -------- -------- ------- --------- -------- -------- ------- Per share information based on the weighted average number of shares outstanding Shares.................................. 31,827,844 31,751,734 31,824,782 31,751,734 Net income.............................. $ 0.22 $ 0.22 $ 0.45 $ 0.44 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Dividends paid.......................... $ 0.27 $ 0.26 $ 0.53 $ 0.51 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to financial statements 4 WASHINGTON REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
(Unaudited) Six Months Ended June 30, ---------------------- 1997 1996 ----------- ----------- Cash Flow From Operating Activities Net income....................................................... $ 14,168 $ 14,035 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.................................... 4,987 3,394 Changes in other assets.......................................... (714) (156) Changes in other liabilities..................................... 722 1,429 -------- -------- Net cash provided by operating activities...................... 19,163 18,702 -------- -------- Cash Flow From Investing Activities Capital Improvements to real estate.............................. (6,650) (4,286) Real estate acquisitions, net.................................... (13,732) (39,186) -------- -------- Net cash used in investing activities.......................... (20,382) (43,472) -------- -------- Cash Flow From Financing Activities Dividends paid................................................... (16,869) (16,193) Borrowings -Line of credit....................................... 18,000 39,000 Principal payments -Mortgage note payable........................ (63) (57) Share options exercised.......................................... 372 -- -------- -------- Net cash provided by financing activities...................... 1,440 22,750 Net increase (decrease) in cash and temporary investments.......... 221 (2,020) Cash and temporary investments at beginning of year................ 1,676 3,532 -------- -------- Cash and temporary investments at end of period.................... 1,897 1,512 -------- -------- -------- -------- Supplemental disclosure of cash flow information: Cash paid during the first six months for interest................. 4,409 1,465 -------- -------- -------- --------
See accompanying notes to financial statements 5 WASHINGTON REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) (In Thousands, except per share amounts)
Additional Paid in Shareholders' Shares Par Value Capital Equity ------------- ------------- -------------- -------------- Balance, December 31, 1996......................... 31,802,975 $ 318 $ 195,305 $ 195,623 Net income......................................... 14,168 14,168 Dividends.......................................... (16,869) (16,869) Share Options Exercised............................ 24,869 0 372 372 ------------- ------------- ---------- ----------- Balance, June 30, 1997............................. 31,827,844 $ 318 $ 192,976 $ 193,294 ------------- ------------- -------------- -------------- ------------- ------------- -------------- --------------
See accompanying notes to financial statements 6 WASHINGTON REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) NOTE A: NATURE OF BUSINESS Washington Real Estate Investment Trust ("WRIT" or the "Trust") is a self-administered 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 Mid-Atlantic 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. In June 1996, WRIT changed its domicile from the District of Columbia to the State of Maryland. Issued and outstanding shares were assigned a par value of $.01 per share. NOTE B: ACCOUNTING POLICIES Basis of Presentation The following 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 the company believes that the disclosures made are adequate to make the information presented not misleading. In 1995 WRIT formed a subsidiary partnership, WRIT Limited Partnership, a Maryland limited partnership, in which WRIT currently owns 99.9% of the partnership interest. WRIT Limited Partnership's financial statements are being consolidated with WRIT's financial statements. All significant intercompany balances and transactions have been eliminated. Minority Interests are included in other income and accounts payable and other liabilities on the accompanying consolidated statements. New Accounting Pronouncements In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS 128"). FAS 128 changes the requirements for calculation and disclosure of earnings per share. This statement eliminates the calculation of primary earnings per share and requires the disclosure of basic earnings per share and diluted earnings per share. WRIT will adopt this statement's required disclosures in connection with the financial statements issued for the reporting period ended December 31, 1997. The adoption of this statement will have an immaterial impact to WRIT's current disclosures. During 1997, FASB issued SFAS No. 129 "Disclosure of Information about Capital Structure" ("FAS 129"). FAS 129 continues the existing requirements to disclose the pertinent rights and privileges of all securities other than ordinary common stock but expands the number of companies subject to portions of its requirements. The adoption of this statement will have no impact to WRIT's current disclosures. 7 WASHINGTON REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) In June, 1997, FASB issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Other Related Information" ("FAS 131"). FAS 131 requires public companies to report financial information about operating segments. WRIT will adopt this statement's required disclosures in connection with the statements issued for the reporting period ended December 31, 1997. In its financial statements for the period ended December 31, 1997. WRIT will be required to disclose certain operating information for each of its four property types: Office Buildings, Shopping Centers, Apartment Buildings and Industrial Distribution Centers. 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 years. WRIT recognizes rental income from its residential and commercial leases when earned and accounts for all rental abatements on a straight-line basis. Deferred Financing Costs Costs associated with the issuance of senior subordinated notes are capitalized and being 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. As of June 30, 1997, no such losses have been recorded. Cash and Temporary Investments Cash and temporary investments includes cash equivalents 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 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. 8 WASHINGTON REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) NOTE C: REAL ESTATE INVESTMENTS WRIT's real estate investment portfolio, at cost, consists of properties located in Maryland, Washington, D.C., Virginia and Delaware as follows: June 30, 1997 (In Thousands) -------------- Office buildings......................................... $ 165,958 Shopping centers......................................... 86,293 Apartment buildings...................................... 61,905 Industrial distribution centers.......................... 58,806 ------------- $ 372,962 -------------- -------------- Properties acquired by WRIT during the first half of 1997 are as follows:
Acquisition Rentable Acquisition Cost Date Property Type Square Feet (In Thousands) - ----------- ------------------------------------------ --------- ----------- ----------------- 2/28/97 Ammendale Technology Park I Industrial 167,000 $ 7,847 2/28/97 Ammendale Technology Park II Industrial 108,000 5,885 ----------- ----------------- 275,000 $ 13,732 ----------- ----------------- ----------- -----------------
NOTE D: UNSECURED LINES OF CREDIT PAYABLE As of June 30, 1997, WRIT had an unsecured credit commitment of $25 million, $4 million of which was outstanding with an interest rate of 6.83%. Interest only is payable monthly, in arrears, on the unpaid principal balance. All new advances and interest rate adjustments upon the expiration of WRIT's interest lock-in dates 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 subject to a yield maintenance obligation and all unpaid principal and interest are due January 31, 1999. The $25.0 million credit commitment requires WRIT to pay the lender an unused commitment fee at the rate of .175% per annum on the amount by which $25.0 million exceeds the balance of outstanding advances and term loans. At June 30, 1997, $21 million of this commitment was unused. This fee is payable quarterly. This commitment also contains certain financial covenants related to debt, net worth, and cash flow, and non-financial covenants which WRIT has met as of June 30, 1997. As of June 30, 1997, WRIT had an unsecured credit commitment of $50 million, $19 million of which was outstanding with interest rates ranging from 6.19% to 6.29%. Interest only is payable monthly, in arrears, on the unpaid principal balance. All unpaid interest and principal are due July 25, 1997 (see Note F: Subsequent Events), and can be prepaid prior to this date without any prepayment fee or yield maintenance obligation. Any new advances shall bear interest at LIBOR plus a spread based on WRIT's interest coverage ratio. 9 WASHINGTON REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) This credit agreement provides WRIT the option to convert any advances or portions thereof into a term loan at any time after January 27, 1996 and prior to July 25, 1997. The principal amount of each term loan, if any, shall be repaid on July 27, 1999. Such term loan(s) may be prepaid subject to a prepayment fee. The $50.0 million credit commitment requires WRIT to pay the lender an unused commitment fee at the rate of 0.15% per annum on the amount by which $50.0 million exceeds the balance of outstanding advances and term loans (see Note F: Subsequent Events). At June 30, 1997, $31.0 million of this commitment was unused. This fee is payable quarterly in arrears. This commitment also contains an interest coverage ratio covenant and certain other non-financial covenants which WRIT has met as of June 30, 1997. NOTE E: SENIOR NOTES PAYABLE On August 13, 1996 WRIT sold $50 million of 7.125% 7-year unsecured notes due August 13, 2003, and $50 million of 7.25% unsecured 10-year notes due August 13, 2006. The 7-year notes were sold at 99.107% of par and the 10-year notes were sold at 98.166% 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% and the 10 year notes bear an effective interest rate of 7.49% for a combined effective interest rate of 7.47%. WRIT used the proceeds of these notes to pay down its lines of credit and to finance acquisitions and capital improvements to its properties. These notes also contain certain financial and non-financial covenants which WRIT has met as of June 30, 1997. NOTE F: SUBSEQUENT EVENTS On July 25, 1997 WRIT's $50 million unsecured credit commitment expired and was replaced by a $50 million unsecured credit commitment by the same bank and a participating bank for the express purpose of purchasing income-producing property and to make capital improvements to real property. Interest only is payable monthly, in arrears, on the unpaid principal balance. All unpaid interest and principal are due July 25, 1998, and can be prepaid prior to this date without any prepayment fee. WRIT has the option to extend this agreement until July 25, 1999. All new advances shall bear interest at LIBOR plus a spread based on WRIT's credit rating on its publicly issued debt. This credit agreement provides the option to WRIT to convert any advances or portions thereof into a term loan at any time after January 25, 1998 and prior to July 25, 1998 or July 25, 1999, if extended. The principal amount of each term loan, if any, shall be repaid on July 25, 2001. Such term loan(s) may be prepaid subject to a prepayment fee. The $50 million credit commitment requires WRIT to pay the lender an unused commitment fee based on WRIT's credit rating on its publicly issued debt. Based on WRIT's current rating, this fee is .175% per annum on the amount by which $50 million exceeds the balance of outstanding advances and term loans. This fee is payable quarterly. This commitment also contains certain non-financial covenants and financial covenants related to debt, net worth, and cash flow. On August 1, 1997 WRIT sold 3.75 million shares of beneficial interest to the public for $61.1 million. WRIT granted the underwriters a 30-day option to purchase up to an additional 562,500 shares to cover over-allotments, if any. WRIT's expenses are expected to be approximately $190,000 and thus the net proceeds from this underwriting are estimated at $60.9 million ($70 million if the Underwriters' over-allotment option is exercised in full). In August, $19 million of the net proceeds was used to repay certain borrowings outstanding under the Trust's lines of credit. The balance of the net proceeds may be used to acquire and/or renovate, expand or improve income-producing properties or to repay other indebtedness drawn under the lines of credit. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATION WRIT's Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that may be considered forward looking. Although the Company 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 the Company's current expectations include general economic conditions, local real estate conditions, the performance of properties that the Company has acquired or may acquire and other risks, detailed from time to time in the Company's past and future SEC reports. REAL ESTATE RENTAL REVENUE: Three Months Ended June 30, 1997 Compared to the Three Months Ended June 30, 1996 Total revenues for the second quarter 1997 increased 20.7% ($3.3 million) to $19.1 million from $15.8 million in the second quarter of 1996. For the second quarter of 1997, WRIT's office buildings had increases of 19.1% in revenues and 19.9% in operating income, over the second quarter of 1996. These increases were due primarily to the acquisitions of the Maryland Trade Center I and II office buildings in May 1996, the expansion of 7700 Leesburg Pike in December 1996 and increases in occupancy at the 1901 Pennsylvania Avenue and the 51 Monroe Street office buildings. Comparing those office buildings owned by WRIT for the entire second quarter of 1996 to their results in the second quarter of 1997, revenues and operating income increased 7.5% and 8.5% respectively, over the second quarter of 1996. These increases were due primarily to the expansion of 7700 Leesburg Pike in December 1996 and increases in occupancy at the 1901 Pennsylvania Avenue and the 51 Monroe Street office buildings. For the second quarter of 1997, WRIT's shopping center revenues increased 6.0% and operating income increased 7.4% over the second quarter of 1996. Revenues increased due primarily to rate and occupancy gains for the group. Operating income increased due to increased revenues, offset partially by increased operating expenses. There were no property additions in WRIT's shopping center portfolio in the second quarter of 1997 compared to the second quarter of 1996. For the second quarter of 1997, WRIT's apartment revenues and operating income increased 27.1% and 27.7% respectively, over the second quarter of 1996. These increases were due primarily to the acquisition of Walker House Apartments in March 1996 and the Ashby Apartments in August of 1996. Comparing those apartment buildings owned by WRIT for the entire second quarter of 1996 to their results in the second quarter of 1997, revenue and operating income increased 2.2% and 2.0% respectively, over the second quarter of 1996. The increases in revenues and operating income were due primarily to increased rental rates for the group, offset partially by increased vacancy at 3801 Connecticut Avenue, Country Club Towers and Walker House. For the second quarter of 1997, WRIT's industrial distribution center revenues and operating income increased 46.4% and 42.5% respectively, over the second quarter of 1996. This was due primarily to the acquisitions in October 1996 of the Alban business center and in December 1996 of the Earhart Building and also the acquisition in March 1997 of Ammendale Technology Park I and II, partially offset by increased bad debt and decreased recoveries. Comparing those industrial distribution centers owned by WRIT for the entire second quarter of 1996 to their same results in the second quarter of 1997, revenue and operating income decreased 3.5% and 4.6% respectively, from the second quarter of 1996. These decreases are primarily due to increased bad debt and decreased recoveries. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REAL ESTATE RENTAL REVENUE: Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996 Total revenues for the six months ended June 30, 1997 increased 23.2% ($7.1 million) to $37.6 million from $30.5 million in the first six months of 1996. For the first six months of 1997, WRIT's office building revenue increased 25.8% and operating income increased 26.6% over the first six months of 1996. These increases were due primarily to the acquisitions of the Maryland Trade Center I and II office buildings in May 1996, the expansion of 7700 Leesburg Pike in December 1996 and increases in occupancy at the 1901 Pennsylvania Avenue and the 51 Monroe Street office buildings. Comparing those office buildings owned by WRIT for the entire first six months of 1996 to their results in the first six months of 1997, revenues and operating income increased 7.0% and 7.1% respectively, over the first six months of 1996. These increases were due primarily to the expansion of 7700 Leesburg Pike in December 1996 and increases in occupancy at the 1901 Pennsylvania Avenue and 51 Monroe Street office buildings For the first six months of 1997, WRIT's shopping center revenues increased 2.7% and operating income increased 7.3% over the first six months of 1996. Revenues increased due to rate and occupancy gains for the group offset partially by reduced CAM recoveries for the group which resulted from decreased utility and snow removal expenses. Operating income increased due to decreased utility and snow removal expenses which were higher in the first half of 1996 due to the unusually severe weather. There were no property additions in WRIT's shopping center portfolio in the first six months of 1997 compared to the first six months of 1996. For the first six months of 1997, WRIT's apartment revenues and operating income increased 35.8% and 36.9% respectively, over the first six months of 1996. These increases were due primarily to the acquisition of Walker House Apartments in March 1996 and the Ashby Apartments in August of 1996. Comparing those apartment buildings owned by WRIT for the entire first six months of 1996 to their results in the first six months of 1997, revenue and operating income increased 2.9% and 4.8% respectively, over the first six months of 1996. The increases in revenues and operating income were due primarily to increased rental rates and occupancy for the group and decreased utility and snow removal expenses which were higher in the first half of 1996 due to the unusually severe weather, offset partially by increased vacancy at Country Club Towers. For the first six months of 1997, WRIT's industrial distribution center revenues and operating income increased 35.9% and 34.3% respectively, over the first six months of 1996. This was due primarily to the acquisitions in October 1996 of the Alban business center and in December 1996 of the Earhart Building and also the acquisition in March 1997 of Ammendale Technology Park I and II, partially offset by increased bad debt and decreased recoveries. Comparing those industrial distribution centers owned by WRIT for the entire first six months of 1996 to their same results in the first six months of 1997, revenue and operating income decreased 4.7% and 5.0% respectively, from the first six months of 1996. These decreases are primarily due to increased bad debt and decreased recoveries. OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended June 30, 1997 Compared to the Three Months Ended June 30, 1996 Depreciation and amortization expense increased $748,000 to $2.6 million as compared to $1.8 million for the second quarter of 1996. This is primarily due to 1996 acquisitions of $69.9 million, 1996 capital and tenant improvement expenditures which totaled $12 million, 1997 acquisitions of $13.7 million and 1997 year-to-date capital and tenant improvement expenditures which total $6.7 million. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other income increased as compared to the second quarter of 1996 due to increased investment earnings. This increase resulted from a higher average balance of cash and temporary investments in the second quarter of 1997 as compared to the second quarter of 1996. Total interest expense was $2.4 million for the second quarter of 1997 as compared to $989,000 for the second quarter of 1996. This increase is primarily attributable to the issuance of $100 million in debt securities in August 1996. For the second quarter of 1997, senior notes payable interest expense was $1.9 million, lines of credit interest expense was $341,000 attributable to advances for 1996 and 1997 acquisitions and mortgage interest expense was $170,000. For the second quarter of 1996, lines of credit interest expense was $816,000 attributable to advances for 1995 and 1996 acquisitions and mortgage interest expense was $173,000. General and administrative expenses increased $90,000 to $1.0 million as compared to $910,000 for the second quarter of 1996. The increase is primarily attributable to personnel additions in 1996 and 1997, increased incentive compensation, and increased shareholder expenses. For the second quarter of 1997, general and administrative expenses as a percentage of revenue were 5.24% as compared to 5.75% for the second quarter of 1996. OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996 Depreciation and amortization expense increased $1.6 million to $5.0 million as compared to $3.4 million for the the first six months of 1996. This is primarily due to 1996 acquisitions of $69.9 million, 1996 capital and tenant improvement expenditures which totaled $12 million, 1997 acquisitions of $13.7 million and 1997 year-to-date capital and tenant improvement expenditures which total $6.7 million. Other income remained unchanged in the first six months of 1997 as compared to the first six months of 1996. Total interest expense was $4.6 million for the first the first six months of 1997 as compared to $1.6 million for the the first six months of 1996. This increase is primarily attributable to the issuance of $100 million in debt securities in August 1996. For the first half of 1997, senior notes payable interest expense was $3.7 million, lines of credit interest expense was $508,000 attributable to advances for 1996 and 1997 acquisitions and capital improvements, and mortgage interest expense was $340,000. For the first half of 1996, lines of credit interest expense was $1.3 million attributable to advances for 1995 and 1996 acquisitions and mortgage interest expense was $346,000. General and administrative expenses increased $292,000 to $2.0 million as compared to $1.7 million for the first six months of 1996. The increase is primarily attributable to personnel additions in 1996 and 1997, increased incentive compensation, and increased shareholder expenses. For the first six months of 1997, general and administrative expenses as a percentage of revenue were 5.20% as compared to 5.45% for the first half of 1996. 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 will continue to be available to WRIT from its existing unsecured credit commitments and management believes that additional sources of capital are available from selling additional shares and/or the sale of medium or long-term notes. The funds raised would be used to pay off any outstanding advances on the Trust's lines of credit and for new acquisitions and capital improvements. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On March 12, 1997, WRIT filed a shelf registration statement with the Securities and Exchange Commission which registers up to $200 million of securities for sale at WRIT's option (see Note F: Subsequent Events). The securities to be sold may be any combination of common shares, debt, preferred stock or common share warrants. Any issuance of preferred shares would require the prior approval of the Board of Trustees and a majority of the shareholders. The shelf registration statement effectively pre-files a registration statement for securities thereby shortening the time required to commence an offering when a decision to raise capital is made. This registration statement is effective for an unlimited period as long as WRIT continues to meet certain Securities and Exchange Commission reporting requirements. WRIT has line of credit commitments in place from commercial banks for up to $75.0 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, 1997, WRIT had outstanding under its lines of credit $23 million in advances with an average interest rate of 6.2%, and $52 million available for future advances. These advances were used for the acquisition of the Ammendale Technology Park I and II and capital improvements and major renovations to WRIT's various properties. The $23 million in advances have maturities ranging from July 25, 1997 until September 26, 1997. The $19 million maturing July 25, 1997 was extended until August 1, 1997 and repaid with the proceeds from the sale of shares of beneficial interest. Cash flow from operating activities totaled $19.2 million for the first six months of 1997, as a result of net income of $14.2 million, depreciation and amortization of $5.0 million, decreases in other assets of $714,000 and increases in liabilities (other than mortgage note, senior notes and lines of credit payable) of $722,000. The majority of the increase in cash flow from operating activities was due to a larger property portfolio. Net cash used in investing activities for the first six months of 1997 was $20.4 million including property acquisitions of $13.7 million and capital improvements to real estate of $6.7 million. Net cash provided by financing activities for the first six months of 1997 was $1.4 million, including line of credit borrowings of $18 million and proceeds from share options exercised of $372,000, offset by principal repayments of $63,000 on the mortgage note payable and $16.9 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 it 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. Historically WRIT has acquired 100% ownership in property. However, in 1995 WRIT formed a subsidiary partnership, WRIT Limited Partnership, in which WRIT currently owns 99.9% of the partnership interest. As of June 30, 1997, WRIT Limited Partnership has acquired 10 properties for cash contributed or loaned to the partnership by WRIT. WRIT intends to use WRIT Limited Partnership to offer property owners an opportunity to contribute properties in exchange for WRIT Limited Partnership units. Such a transaction will enable property owners to diversify their holdings and to obtain a tax deferred contribution for WRIT Limited Partnership units rather than make a taxable cash sale. To date, no such exchange transactions have occurred. WRIT believes that WRIT Limited Partnership will provide WRIT an opportunity to acquire real estate assets which might not otherwise have been offered to it. 14 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 June 25, 1997, the following members were elected to the board of Trustees for a term of three years: Affirmative Negative Votes Votes ------------ --------- Arthur A. Birney............. 27,136,456 479,599 John M. Derrick.............. 27,199,815 416,240 John M. Derrick was elected as a successor Trustee for B. Franklin Kahn, who attained the age of 72 and retired from the Board per the Trust's By-Laws. Trustees whose term of office as a Trustee continued after the meeting were William N. Cafritz, Edmund B. Cronin, Jr., Benjamin H. Dorsey, David M. Osnos, and Stanley P. Snyder. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (27) Financial Data Schedule (b) Reports on Form 8-K None 15 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 //Larry E. Finger// --------------------------------------------- Larry E. Finger, Senior Vice President Finance and Chief Financial Officer //Laura M. Franklin// --------------------------------------------- Laura M. Franklin, Vice President Finance and Chief Accounting Officer Date: August 13, 1997 16