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
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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