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 SEPTEMBER 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 Identification
incorporation or organization) 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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WASHINGTON REAL ESTATE INVESTMENT TRUST
1
INDEX
Page
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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 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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)
September 30, December 31,
2000 1999
--------------------- ---------------------
Assets
Real estate at cost $679,080 $661,870
Accumulated depreciation (97,178) (83,574)
--------------------- ---------------------
Total investment in real estate 581,902 578,296
Cash and temporary investments 4,250 4,716
Rents and other receivables, net of allowance for
doubtful accounts of $1,687 and $799, respectively 7,478 6,572
Prepaid expenses and other assets 20,580 18,896
--------------------- ---------------------
$614,210 $608,480
===================== =====================
Liabilities
Accounts payable and other liabilities $ 10,972 $ 11,421
Tenant security deposits 5,537 5,006
Advance rents 1,451 3,304
Mortgage notes payable 86,465 87,038
Lines of credit payable 40,000 33,000
Notes payable 210,000 210,000
--------------------- ---------------------
354,425 349,769
--------------------- ---------------------
Minority interest 1,555 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 September 30, 2000 and December 31,
1999, respectively 357 357
Additional paid-in capital 257,873 256,832
--------------------- ---------------------
258,230 257,189
--------------------- ---------------------
$614,210 $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 September 30, Nine Months Ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Real estate rental revenue $34,230 $29,566 $ 99,520 $ 86,084
Real estate expenses (9,676) (8,985) (28,679) (26,085)
------------ ------------ ------------ ------------
Operating income 24,554 20,581 70,841 59,999
Depreciation and amortization (5,810) (4,805) (16,889) (13,900)
------------ ------------ ------------ ------------
Income from real estate 18,744 15,776 53,952 46,099
Other income 288 84 679 521
Interest expense (6,394) (5,463) (18,796) (16,070)
General and administrative (1,914) (1,571) (5,757) (4,510)
------------ ------------ ------------ ------------
Income before gain on sale of real estate 10,724 8,826 30,078 26,040
------------ ------------ ------------ ------------
Gain on sale of real estate 2,069 - 3,567 7,909
------------ ------------ ------------ ------------
Net Income $12,793 $ 8,826 $ 33,645 $ 33,949
============ ============ ============ ============
Per share information based on the
weighted average number
of shares outstanding
Shares-- Basic 35,734 35,716 35,734 35,711
Shares-- Diluted 35,932 35,721 35,829 35,728
Net income per share-- Basic $ 0.36 $ 0.25 $ 0.94 $ 0.95
============ ============ ============ ============
Net income per share-- Diluted $ 0.36 $ 0.25 $ 0.94 $ 0.95
============ ============ ============ ============
Dividends paid $0.3125 $0.2925 $ 0.9175 $ 0.8651
============ ============ ============ ============
See accompanying notes to financial statements
4
WASHINGTON REAL ESTATE INVESTMENT TRUST
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 33,645 33,645
Dividends (32,786) (32,786)
Share Grants 13 - 182 182
-------------------- --------------------- --------------------- ---------------------
Balance, September 30, 2000 35,734 $357 $257,873 $258,230
==================== ===================== ===================== =====================
See accompanying notes to financial statements
5
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended September 30,
2000 1999
----------- -----------
Cash Flow From Operating Activities
Net income $ 33,645 $ 33,949
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate (3,567) (7,909)
Depreciation and amortization 16,703 13,900
Changes in other assets (3,061) (1,459)
Changes in other liabilities (1,740) (3,333)
----------- -----------
Net cash provided by operating activities 41,980 35,148
----------- -----------
Cash Flow From Investing Activities
Capital improvements to real estate (12,248) (15,359)
Non-real estate capital improvements (251) (227)
Real estate acquisitions (9,503) (48,434)
Cash received from sale of real estate 5,732 22,033
----------- -----------
Net cash used in investing activities (16,270) (41,987)
----------- -----------
Cash Flow From Financing Activities
Dividends paid (32,786) (30,892)
Borrowings - Lines of credit 7,000 29,000
Repayments - Lines of credit - (44,000)
Proceeds from Mortgage note payable - 50,000
Principal payments - Mortgage note payable (573) (424)
Share options exercised 183 496
----------- -----------
Net cash (used) provided by financing activities (26,176) 4,180
----------- -----------
Net decrease in cash and temporary investments (466) (2,659)
Cash and cash equivalents at beginning of year 4,716 4,595
----------- -----------
Cash and cash equivalents at end of period $ 4,250 $ 1,936
=========== ===========
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid during the first nine months for interest $ 21,869 $ 18,968
=========== ===========
Supplemental schedule of non-cash investing and financing activities
- --------------------------------------------------------------------
On September 20, 1999, WRIT purchased Avondale Apartments for an acquisition
cost of $13.0 million. WRIT assumed a mortgage in the amount of $8.7 million and
paid the balance in cash. The $8.7 million of assumed mortgage is not included
in the $48.4 million amount shown as real estate acquisitions.
See accompanying notes to financial statements
6
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
7
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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
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 will 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. 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
8
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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.
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:
September 30, 2000
(in thousands)
--------------
Office buildings $365,173
Industrial distribution centers 117,002
Multifamily 101,834
Retail centers 95,071
--------
$679,080
========
WRIT acquired the following properties during 2000:
Acquisition Date Property Property Rentable Square Feet Purchase Contract
Name Type Cost (in
thousands)
- --------------------------------------------------------------------------------------------------------------------
February 29, 2000 833 South Washington Street Retail 6,000 $1,350
Center
May 5, 2000 962 Wayne Plaza Office 91,000 $7,700
August 9, 2000 Munson Hill Towers Multifamily n/a $ 310
Ground Lease
On February 29, 2000, WRIT sold Prince William Plaza Shopping Center for $2.8
million in cash resulting in a gain of approximately $1.5 million. WRIT
anticipates that this sale will be the first step of a tax-deferred exchange
whereby the sales proceeds will be reinvested on a tax-free basis in another
real property.
On July 7, 2000, WRIT sold a 0.725 acre out-parcel previously associated with
the 12.02 acre Westminster Shopping Center in Westminster, Maryland for
$425,000, resulting in a gain of approximately $360,000. WRIT utilized $310,000
of the proceeds from this sale in a tax-deferred exchange on August 9, 2000, to
purchase the land underlying the Munson Hill Apartments that was previously
leased through a ground operating lease.
On August 22, 2000, WRIT sold the Clairmont Shopping Center in Salisbury,
Maryland for $3.0 million, resulting in
9
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
a gain of approximately $1.6 million. Subsequent to the end of the quarter, WRIT
utilized the proceeds from this sale in a tax-deferred exchange (see Note 8).
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 September 30, 2000 are as follows:
(in thousands)
2000 $ 197
2001 833
2002 902
2003 7,376
2004 820
Thereafter 76,337
--------
Total $ 86,465
========
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of September 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 September 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
10
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 September 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 September 30, 2000.
NOTE 7: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Distribution
Centers, Multifamily 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. Multifamily
represent 20 percent of real estate rental revenue. These properties provide
housing for families throughout the Washington Metropolitan area. Shopping
Centers represent the remaining 13 percent of real estate rental revenue and are
typically neighborhood grocery store or drug store anchored retail centers.
The accounting policies of each 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
SEPTEMBER 30, 2000
(in thousands)
--------------
Three Months Ended September 30, 2000
-------------------------------------
Office Industrial Shopping Corporate
Buildings Centers Multifamily Centers and Other Consolidated
-----------------------------------------------------------------------------------------------
Real estate rental revenue $ 18,075 $ 5,129 $ 6,585 $ 4,441 $ - $ 34,230
Real estate expenses (5,466) (960) (2,389) (861) - (9,676)
-----------------------------------------------------------------------------------------------
Operating income 12,609 4,169 4,196 3,580 - 24,554
Depreciation and amortization (3,345) (976) (892) (597) - (5,810)
-----------------------------------------------------------------------------------------------
Income from real estate 9,264 3,193 3,304 2,983 - 18,744
Other income - - - - 288 288
Interest expense (407) - (1,082) (160) (4,754) (6,394)
General and administrative - - - - (1,914) (1,914)
-----------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 8,857 $ 3,193 $ 2,222 $ 2,823 $(6,371) $ 10,724
===============================================================================================
Capital investments $ 9,358 $ 1,636 $ 1,149 $ 472 $ 118 $ 12,733
===============================================================================================
Total assets $326,825 $107,373 $80,266 $82,310 $17,436 $614,210
===============================================================================================
(in thousands)
--------------
Three Months Ended September 30, 1999
-------------------------------------
Office Industrial Shopping Corporate
Buildings Centers Multifamily Centers and Other Consolidated
-----------------------------------------------------------------------------------------------
Real estate rental revenue $ 15,450 $ 4,049 $ 5,736 $ 4,331 $ - $ 29,566
Real estate expenses (4,991) (816) (2,234) (944) - (8,985)
-----------------------------------------------------------------------------------------------
Operating income 10,459 3,233 3,502 3,387 - 20,581
Depreciation and amortization (2,754) (819) (663) (569) - (4,805)
-----------------------------------------------------------------------------------------------
Income from real estate 7,705 2,414 2,839 2,818 - 15,776
Other income - - - - 84 84
Interest expense (411) - (61) (163) (4,828) (5,463)
General and administrative - - - - (1,571) (1,571)
-----------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 7,294 $ 2,414 $ 2,778 $ 2,655 $(6,315) $ 8,826
===============================================================================================
Capital investments $ 4,853 $ 2,941 $13,926 $ 389 $ 81 $ 22,190
===============================================================================================
Total assets $316,511 $105,031 $80,155 $83,576 $16,949 $602,222
===============================================================================================
12
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(in thousands)
--------------
Nine Months Ended September 30, 2000
------------------------------------
Office Industrial Shopping Corporate
Buildings Centers Multifamily Centers and Other Consolidated
--------------------------------------------------------------------------------------------
Real estate rental revenue $ 52,169 $14,343 $19,448 $13,560 $ - $ 99,520
Real estate expenses (15,673) (2,973) (7,151) (2,882) - (28,679)
--------------------------------------------------------------------------------------------
Operating income 36,496 11,370 12,297 10,678 - 70,841
Depreciation and amortization (9,619) (2,851) (2,596) (1,823) - (16,889)
--------------------------------------------------------------------------------------------
Income from real estate 26,877 8,519 9,701 8,855 - 53,952
Other income - - - - 679 679
Interest expense (1,159) - (3,248) (480) (13,909) (18,796)
General and administrative - - - - (5,757) (5,757)
--------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 25,718 $ 8,519 $ 6,453 $ 8,375 $(18,987) $ 30,078
=============================================================================================
Capital investments $ 13,138 $ 3,454 $ 2,751 $ 2,378 $ 281 $ 22,002
============================================================================================
(in thousands)
--------------
Nine Months Ended September 30, 1999
------------------------------------
Office Industrial Shopping Corporate
Buildings Centers Multifamily Centers and Other Consolidated
--------------------------------------------------------------------------------------------
Real estate rental revenue $ 44,297 $11,791 $16,622 $13,374 $ - $ 86,084
Real estate expenses (14,099) (2,584) (6,373) (3,029) - (26,085)
--------------------------------------------------------------------------------------------
Operating income 30,198 9,207 10,249 10,345 - 59,999
Depreciation and amortization (7,878) (2,379) (1,980) (1,663) - (13,900)
--------------------------------------------------------------------------------------------
Income from real estate 22,320 6,828 8,269 8,682 - 46,099
Other income - - - - 521 521
Interest expense (1,238) - (61) (491) (14,280) (16,070)
General and administrative - - - - (4,510) (4,510)
--------------------------------------------------------------------------------------------
Net income before gain on
sale of real estate $ 21,082 $ 6,828 $ 8,208 $ 8,191 $(18,269) $ 26,040
============================================================================================
Capital investments $ 37,024 $18,767 $ 6,465 $ 1,537 $ 227 $ 64,020
============================================================================================
NOTE 8: SUBSEQUENT EVENT
- ------------------------
On October 10, 2000, WRIT purchased Courthouse Square for a purchase price of
$17 million. A portion of the funds used to purchase the 113,000 square foot
office/retail property were provided from a combination of a $14 million advance
on WRIT's lines of credit and proceeds from the disposition of other WRIT
property through a tax-deferred exchange.
On November 6, 2000, WRIT sold $55 million of 7.78% unsecured notes due November
2004. The notes bear an effective interest rate of 7.89% percent. Total
proceeds to the Trust, net of underwriting fees, were $54.8 million. WRIT used
the proceeds of these notes to repay advances on its lines of credit.
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 September
- -----------------------------------------------------------------------------
30, 2000 Compared to the Three Months Ended September 30, 1999
- --------------------------------------------------------------
Total revenues for the third quarter of 2000 increased 15.8% ($4.7 million) to
$34.2 million from $29.6 million in the third quarter of 1999. Operating income
increased 19.3% ($4.0 million) to $24.6 million from $20.6 million in the third
quarter of 1999.
For the third quarter of 2000, WRIT's office buildings had increases of 17.0% in
revenues and 20.6% in operating income, over the third quarter of 1999. These
increases were primarily due to 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
third quarters of 1999 and 2000, revenue and operating income increased 13.1%
and 14.8%, 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 $0.5 million (9.5%) in real estate expenses during
third quarter 2000. Occupancy levels were relatively unchanged, increasing
slightly to 96.7% in third quarter 2000 from 96.5% in third quarter 1999.
For the third quarter of 2000, WRIT's industrial distribution center revenues
and operating income increased 26.7% and 29.0%, respectively, over the third
quarter of 1999. These increases were primarily due to increased core portfolio
operating income. Comparing those industrial distribution centers owned by WRIT
for the entire third quarter of 1999 and 2000, revenue and operating income
increased by 14.3% and 14.2%, 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 third quarter of 2000 from 94.5% in the
third quarter of 1999. Operating income was partially offset by a $0.1 million
(17.6%) increase in real estate expenses during third quarter 2000.
For the third quarter of 2000, WRIT's apartment revenues and operating income
increased 14.8% and 19.8%, respectively, over the third 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
third quarter of 1999 and 2000, revenue and operating income increased by 8.0%
and 11.6%, respectively. These increases in revenues and operating income were
primarily due to increased rental rates and occupancy. Occupancy rates increased
increased from 97.4% in the third quarter of 1999 to 97.7% in the third quarter
of 2000. Operating income was partially offset by a $0.2 million (6.9%) increase
in real estate expenses during third quarter 2000.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the third quarter of 2000, WRIT's shopping center revenues and operating
income increased 2.5% and 5.7%, respectively, over the third quarter of 1999.
These increases were primarily due to increased core portfolio revenues and
operating income, offset by the February 2000 sale of Prince William Plaza and
the August 2000 sale of Clairmont Center. Comparing those shopping centers
owned by WRIT for the entire third quarter of 1999 and 2000, revenue and
operating income increased by 9.8% and 14.8%, respectively. These increases
were primarily due to increased rental rates and an increase in occupancy
from 94.0% in the third quarter of 1999 to 94.9% in the third quarter of 2000.
Operating income also increased due to a $0.1 million (4.9%) decrease in real
estate expenses during third quarter 2000.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2000 Compared to the Nine Months Ended September 30, 1999
- ---------------------------------------------------------
Total revenues for the first nine months of 2000 increased 15.6% ($13.4 million)
to $99.5 million from $86.1 million for the first nine months of 1999.
Operating income increased 18.1% ($10.8 million) to $70.8 million for the first
nine months of 2000 from $60.0 million for the first nine months of 1999.
For the first nine months of 2000, WRIT's office buildings had increases of
17.8% in revenues and 20.9% in operating income, over the first nine 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 nine months
of 1999 and 2000, revenue and operating income increased 16.1% and 15.6%,
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 $1.6 million (11.2%) in real estate expenses in the first nine
months of 2000.
For the first nine months of 2000, WRIT's industrial distribution center
revenues and operating income increased 21.6% and 23.5%, respectively, over the
first nine months of 1999. This was primarily due to the acquisitions of Dulles
South IV in January 1999, 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 nine months
of 1999 and 2000, revenue and operating income increased by 19.5% and 21.2%,
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 $0.4
million (15.1%) in real estate expenses in the first nine months of 2000.
For the first nine months of 2000, WRIT's apartment revenues and operating
income increased 17.0% and 20.0%, respectively, over the first nine 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 nine
months of 1999 and 2000, revenue and operating income increased by 5.3% and
7.1%, respectively. Operating income was partially offset by an increase of
$0.8 million (12.2%) in real estate expenses in the first nine months of 2000.
For the first nine months of 2000, WRIT's shopping center revenues and operating
income increased 1.4% and 3.2%, respectively, over the first nine months of
1999. The increases in revenue and operating income were primarily due to
increased core portfolio revenues, offset by the sale of Prince William Plaza in
February 2000 and the sale of Clairmont Center in August 2000. Comparing those
shopping centers owned by WRIT for the entire
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
first nine months of 1999 and 2000, revenue and operating income increased by
3.9% and 3.4%, 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 (4.9%) in real estate
expenses in the first nine months of 2000.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended September
- --------------------------------------------------------------------------------
30, 2000 Compared to the Three Months Ended September 30, 1999
- --------------------------------------------------------------
Real estate expenses increased $0.7 million or 7.7% to $9.7 million for the
third quarter of 2000 as compared to $9.0 million for the third 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 $28.8
million of properties sold in 1999 and 2000, higher tax rates and a 5.6%
increase in core portfolio operating expense.
Depreciation and amortization expense increased $1.0 million or 20.9% to $5.8
million for the third quarter of 2000 as compared to $4.8 million for the third
quarter of 1999. This was primarily due to 1999 and year to date 2000
acquisitions of $61.8 million and $9.5 million, respectively, and 1999 and year
to date 2000 capital and tenant improvement expenditures which totaled $17.7
million and $12.2 million, respectively. The amount was partially offset by 1999
and year to date 2000 dispositions of $23.1 million and $5.8 million,
respectively.
Total interest expense was $6.4 million for the third quarter of 2000 as
compared to $5.5 million for the third 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, net of interest savings on the
line of credit borrowings paid off with the proceeds of this note. The increase
was also due to the assumption of an $8.7 million mortgage in September 1999 in
conjunction with the purchase of Avondale Apartments. For the third 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 $0.8 million. For the
third 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 $0.7
million.
General and administrative expenses increased $0.3 million to $1.9 million for
the third quarter of 2000 as compared to $1.6 million for the third quarter of
1999. The change was primarily attributable to lower increased salaries and
incentive compensation. For the third quarter of 2000, general and
administrative expenses as a percentage of revenue were 5.6% as compared to 5.3%
for the third quarter of 1999.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Nine Months Ended September
- -------------------------------------------------------------------------------
30, 2000 Compared to the Nine Months Ended September 30, 1999
- -------------------------------------------------------------
Real estate expenses increased $2.6 million or 9.9% to $28.7 million for the
first nine months of 2000 as compared to $26.1 million for the first nine 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 $3.0 million or 21.5% to $16.9
million for the first nine months
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of 2000 as compared to $13.9 million for the first nine 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 $12.2 million,
respectively.
Total interest expense was $18.8 million for the first nine months of 2000 as
compared to $16.1 million for the first nine months 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, net of interest savings on the
line of credit borrowings paid off with the proceeds of this note. 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 nine months of 2000, notes payable interest expense was
$11.8 million, mortgage interest expense was $4.9 million and lines of credit
interest expense was $2.1 million. For the first nine months of 1999, notes
payable interest expense was $11.8 million, lines of credit interest expense was
$2.5 million and mortgage interest expense was $1.8 million.
General and administrative expenses increased $1.3 million to $5.8 million for
the first nine months of 2000 as compared to $4.5 million for the first nine
months of 1999. The change was primarily attributable to increased salaries and
incentive compensation. For the first nine months of 2000, general and
administrative expenses as a percentage of revenue were 5.8% as compared to 5.2%
for the first nine months of 1999.
Gain on sale of real estate for the nine months ended September 30, 2000 was
$3.6 million, resulting from the sale of Prince William Plaza, Clairmont Center
and the Westminster pad site. Gain on sale of real estate for the nine months
ended September 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, the sale of property 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 and Note 8 for further discussion). Only $40 million (all from
unsecured lines of credit payable) of the $336.7 million total debt outstanding
at September, 2000 was at a floating rate (see Note 8 for further discussion of
financing activities). 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 September 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 September 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
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, the sale of Clairmont
Centre in August 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 properties.
On November 6, 2000, WRIT sold $55 million of 7.78 percent 4-year unsecured
notes due November 2004 (see Note 8). Total proceeds to the Trust, net of
underwriter fees, were $54.8 million. WRIT used the proceeds of these notes to
repay advances on its lines of credit.
Cash flow from operating activities totaled $42.0 million for the first nine
months of 2000, as a result of net income before gain on sale of real estate of
$33.6 million, depreciation and amortization of $16.7 million, increases in
other assets of $3.1 million and decreases in liabilities (other than mortgage
note, senior notes and lines of credit payable) of $1.8 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 nine months of 2000 was
$16.3 million, including real estate acquisitions of $9.5 million and capital
improvements to real estate of $12.2 million, offset by cash received from sale
of real estate properties of $5.7 million.
Net cash used in financing activities for the first nine months of 2000 was
$26.2 million, including line of credit borrowings of $7.0 million, principal
repayments on the mortgage notes payable of $0.6 million and $32.8 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:
Nine Months Ended
September 30, Year Ended December 31,
2000 1999 1998 1997
------------------ ---- ---- ----
Earnings to fixed charges 2.60x 2.61x 3.01x 4.08x
Debt service coverage 3.38x 3.42x 3.84x 5.08x
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 FINANCIAL MARKET RISK
- --------------------------------------------------------------------
The principal material financial 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
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
third quarter 2000 or third quarter 1999. Any future cost associated with Year
2000 compliance is not expected to be material to WRIT's financial position.
19
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4) Instruments defining the rights of security holders,
including indentures
(10) Management contracts, plans and arrangements
(h) Dividend Equivalent Plan.
(i) Dividend Equivalent Right Agreement.
(12) Computation of Ratios
(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.
3. October 24, 2000 - Report pursuant to Item 5 on the release of
the Trust's September 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: November 14, 2000
21