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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 MARCH 31, 2001 COMMISSION FILE NO. 1-6622
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WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 53-0261100
------------------------------ -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
6110 EXECUTIVE BOULEVARD, ROCKVILLE, MARYLAND 20852
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (301) 984-9400
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(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 35,780,869
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
INDEX
Page
----
Part I: Financial Information
---------------------
Item l. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II: Other Information
-----------------
Item l. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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, 2000 included in the Trust's 2000 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)
March 31, December 31,
2001 2000
------------ ------------
Assets
Real estate at cost $ 702,157 $ 698,513
Accumulated depreciation (106,626) (100,906)
--------- ---------
Total investment in real estate 595,531 597,607
Cash and cash equivalents 5,075 6,426
Rents and other receivables, net of allowance for doubtful
accounts of $1,881 and $1,743, respectively 9,555 8,427
Prepaid expenses and other assets 19,617 19,587
--------- ---------
$ 629,778 $ 632,047
========= =========
Liabilities
Accounts payable and other liabilities $ 10,818 $ 13,048
Tenant security deposits 5,526 5,624
Advance rents 1,839 1,901
Mortgage notes payable 86,057 86,260
Lines of credit payable - -
Notes payable 265,000 265,000
--------- ---------
369,240 371,833
--------- ---------
Minority interest 1,571 1,558
--------- ---------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000,000
shares authorized: 35,781 and 35,740 shares issued
and outstanding at March 31, 2001 and December 31,
2000, respectively 358 357
Additional paid-in capital 258,609 258,299
--------- ---------
258,967 258,656
--------- ---------
$ 629,778 $ 632,047
========= =========
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 March 31,
-------------------------------
2001 2000
-------- -------
Real estate rental revenue $ 35,324 $31,935
Real estate expenses (10,239) (9,372)
-------- -------
Operating income 25,085 22,563
Depreciation and amortization (6,214) (5,430)
-------- -------
Income from real estate 18,871 17,133
Other income 199 149
Interest expense (6,676) (6,090)
General and administrative (1,666) (1,780)
-------- -------
Income before gain on sale of real estate 10,728 9,412
-------- -------
Gain on sale of real estate - 1,498
-------- -------
Net Income $ 10,728 $10,910
======== =======
Per share information based on the
weighted average number
of shares outstanding
Shares--Basic 35,778 35,734
Shares--Diluted 36,164 35,763
Income before gain on sale of real estate - Basic $ 0.30 $ 0.26
======== =======
Income before gain on sale of real estate - Diluted $ 0.30 $ 0.26
======== =======
Net income per share--Basic $ 0.30 $ 0.31
======== =======
Net income per share--Diluted $ 0.30 $ 0.31
======== =======
Dividends paid $ 0.3125 $0.2925
======== =======
See accompanying notes to financial statements
4
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(In Thousands)
(Unaudited)
Additional Shareholders'
Shares Par Value Paid in Capital Equity
------ --------- ------------- ----------
Balance, December 31, 2000 35,740 $357 $258,299 $258,656
Net income 10,728 10,728
Dividends (11,182) (11,182)
Share Options Exercised
and Share Grants 41 1 764 765
------ ---- -------- --------
Balance, March 31, 2001 35,781 $358 $258,609 $258,967
====== ==== ======== ========
See accompanying notes to financial statements
5
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended March 31,
2001 2000
------- --------
Cash Flow From Operating Activities
Net income $ 10,728 $ 10,910
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate - (1,498)
Depreciation and amortization 6,214 5,430
(Increases) decreases in other assets (1,609) 467
Changes in other liabilities (1,676) (3,589)
------- --------
Net cash provided by operating activities 13,657 11,720
------- --------
Cash Flow From Investing Activities
Capital improvements to real estate (2,125) (3,016)
Non-real estate capital improvements (43) (122)
Real estate acquisitions (1,520) (1,358)
Cash received for sale of real estate - 2,456
------- --------
Net cash used in investing activities (3,688) (2,040)
------- --------
Cash Flow From Financing Activities
Dividends paid (11,182) (10,452)
Borrowings - Lines of credit - 2,000
Repayments - Lines of credit - -
Principal payments - Mortgage note payable (202) (187)
Share options exercised 64 157
------- --------
Net cash used by financing activities (11,320) (8,482)
------- --------
Net increase (decrease) in cash and cash equivalents (1,351) 1,198
Cash and cash equivalents at beginning of year 6,426 4,716
------- --------
Cash and cash equivalents at end of period $ 5,075 $ 5,914
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest during the three months ended $ 9,090 $ 9,694
March 31, 2001 ======== ========
See accompanying notes to financial statements
6
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 1: NATURE OF BUSINESS
- --------------------------
Washington Real Estate Investment Trust ("WRIT" or the "Trust"), a Maryland real
estate investment trust, 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 at least 90% of its taxable income to
its shareholders each year (95% for years prior to 2001), 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
7
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a 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. 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 the shorter of the useful life or the term of the lease.
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 2001 or 2000.
Cash and Cash Equivalents
Cash and cash equivalents include investments readily convertible to known
amounts of cash with original maturities of 90 days or less.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires
8
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
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:
March 31, 2001
(in thousands)
---------------------
Office buildings $385,230
Industrial centers 117,857
Multifamily 104,114
Retail centers 94,956
--------
$702,157
========
WRIT acquired the following property during 2001:
Purchase Contract
Property Property Rentable Square Cost (in
Acquisition Date Name Type Feet Units thousands)
---------------- ---- ---- ---- ----- ----------
February 15, 2001 1611 N. Clarendon Multifamily 10,640 14 $1,500
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.
9
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
Annual maturities of principal as of March 31, 2001 are as follows:
(in thousands)
2001 $ 631
2002 903
2003 7,368
2004 820
2005 26,335
Thereafter 50,000
-------
Total $86,057
=======
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of March 31, 2001, WRIT had two unsecured credit commitments in the amount of
$50 million and $25 million, with $0 outstanding under the credit commitments
leaving $75 million available. Under the terms of the credit commitments,
interest only is payable monthly, in arrears, on the unpaid principal balance.
All new advances will bear interest at LIBOR plus a spread based on WRIT's
credit rating on its publicly issued debt. All unpaid interest and principal can
be prepaid prior to the expiration of WRIT's interest rate lock-in periods. This
prepayment is not subject to a yield maintenance obligation or other penalty on
the $50 million credit commitment but is subject to a yield maintenance
obligation on the $25 million credit commitment.
The $50 million credit commitment requires WRIT to pay the lender unused
commitment fees at the rate of 0.200 percent per annum on the amount by which
the unused portion of the commitment exceeds the balance of outstanding advances
and term loans. The $25 million credit commitment requires WRIT to pay the
lender a facility management fee of 0.175 percent per annum on the commitment
amount of $25 million. These fees are payable quarterly. The credit
commitments also contain certain financial covenants related to debt, net worth,
and cash flow as well as non-financial covenants, all of which WRIT has met as
of March 31, 2001.
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
10
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
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 and closed hedge settlements of approximately $7.2 million will
be amortized over the lives of the notes using the effective interest method.
On November 6, 2000, WRIT sold $55.0 million of 7.78 percent 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.
These notes contain certain financial and non-financial covenants, all of which
WRIT has met as of March 31, 2001.
NOTE 7: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Centers,
Multifamily and Retail Centers. Office Buildings represent 53 percent of real
estate rental revenue and provide office space for various types of businesses.
Industrial Centers represent 14 percent of real estate rental revenue and are
used for warehousing and distribution. Multifamily represents 19 percent of
real estate rental revenue. These properties provide housing for families
throughout the Washington Metropolitan area. Retail Centers represent the
remaining 14 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
MARCH 31, 2001
(in thousands)
Three Months Ended March 31, 2001
----------------------------------
Industrial Retail Corporate and
Office Buildings Centers Multifamily Centers Other Consolidated
---------------- --------- ----------- ------- ----- ------------
Real estate rental revenue $ 18,828 $ 4,997 $ 6,696 $ 4,803 $ - $ 35,324
Real estate expenses (5,677) (1,208) (2,348) (1,006) - (10,239)
------- -------- ------ ------ ------- --------
Operating income 13,151 3,789 4,348 3,797 - 25,085
Depreciation and amortization (3,451) (1,020) (935) (582) (226) (6,214)
------- -------- ------ ------ ------- --------
Income from real estate 9,700 2,769 3,413 3,215 (226) 18,871
Other income - - - - 199 199
Interest expense (336) - (1,080) (157) (5,103) (6,676)
General and administrative - - - - (1,666) (1,666)
-------- -------- ------ ------ ------- --------
Income before gain on sale of
real estate $ 9,364 $ 2,769 $ 2,333 $ 3,058 $(6,796) $ 10,728
======== ======== ======= ======= ======= ========
Capital investments $ 1,661 $ (74) (1) $ 1,995 $ 63 $ 43 $ 3,688
======== ======== ======= ======= ======= ========
Total assets $341,542 $107,267 $80,538 $81,942 $18,489 $629,778
======== ======== ======= ======= ======= ========
(1) This credit reflects a reimbursable tenant improvement reclassified to
Other Receivables in first quarter 2001. The funding of this improvement by
WRIT occurred during 2000 and 2001.
(in thousands)
Three Months Ended March 31, 2000
----------------------------------
Industrial Retail Corporate and
Office Buildings Centers Multifamily Centers Other Consolidated
---------------- ------------ ----------- --------- ------------- ------------
Real estate rental revenue $ 16,695 $ 4,315 $ 6,400 $ 4,525 $ - $ 31,935
Real estate expenses (4,977) (1,022) (2,340) (1,033) - 9,372
-------- -------- ------ ------ ------ --------
Operating income 11,718 3,293 4,060 3,492 - 22,563
Depreciation and amortization (3,082) (915) (849) (584) - 5,430
-------- -------- ------ ------ ------ --------
Income from real estate 8,636 2,378 3,211 2,908 - 17,133
Other income - - - - 149 149
Interest expense (343) - (1,084) (161) (4,502) (6,090)
General and administrative - - - - (1,780) (1,780)
-------- -------- ------ ------ ------ --------
Income before gain on sale of
real estate $ 8,293 $ 2,378 $ 2,127 $ 2,747 $(6,133) $ 9,412
======== ======== ======= ======= ======= ========
Capital investments $ 2,438 $ 893 $ 559 $ 1,617 $ 134 $ 5,641
======== ======== ======= ======= ======= ========
Total assets $320,024 $105,254 $79,237 $83,925 $18,878 $607,318
======== ======== ======= ======= ======= ========
12
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 8: SUBSEQUENT EVENT
- ------------------------
On April 21, 2001, WRIT acquired One Central Plaza for a purchase price of
$44.4 million. This 274,000 square foot office space was financed through a
$43.0 million advance on the unsecured lines of credit discussed in Note 5.
On April 24, 2001, WRIT completed a public offering of 2,300,000 Shares of
Beneficial Interest priced at $22.15 per share. $43.0 million of the $48.2
million net proceeds from the sale of the shares was used to repay the $43.0
million borrowing related to the acquisition of One Central Plaza. On May 3,
2001, the underwriter exercised an over-allotment option to increase the
offering by an additional 235,000 shares at $22.15 per share. This additional
sale closed on May 8, 2001 and resulted in net proceeds of $4.9 million to the
Trust.
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 the economic health
of WRIT's tenants, the economic health of the Greater Washington-Baltimore
region, or other markets WRIT may enter, the supply of competing properties,
inflation, consumer confidence, unemployment rates, consumer tastes and
preferences, stock price and interest rate fluctuations, WRIT's future capital
requirements, competition, compliance with applicable laws, including those
concerning the environment and access by persons with disabilities, weather
conditions and the effects of changes in capital availability to the technology
and biotechnology sectors of the economy.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Three Months Ended March 31,
- -----------------------------------------------------------------------------
2001 Compared to the Three Months Ended March 31, 2000
- ------------------------------------------------------
Total revenues for the first quarter of 2001 increased 10.6% ($3.4 million) to
$35.3 million from $31.9 million in the first quarter of 2000. Operating income
increased 11.2% ($2.5 million) to $25.1 million from $22.3 million in the first
quarter of 2000.
For the first quarter of 2001, WRIT's office buildings had increases of 12.8% in
revenues and 12.2% in operating income, respectively, over the first quarter of
2000. These increases were primarily due to increased core portfolio revenues
and operating income, the acquisition of Wayne Plaza in May 2000 and the
acquisition of Courthouse Square in October 2000. Comparing those office
buildings owned by WRIT for the entire first quarters of 2000 and 2001, revenue
and operating income increased 5.9% and 6.3%, respectively. These increases in
revenues and operating income were primarily due to increases in rental rates
and occupancy across the sector. This operating income increase was partially
offset by an increase of $0.7 million in real estate expenses during first
quarter 2001, principally due to higher operating expenses and higher real
estate taxes. Occupancy levels increased to 98.3% in first quarter 2001 from
97.2% in first quarter 2000.
For the first quarter of 2001, WRIT's industrial distribution center revenues
and operating income increased 15.8% and 15.1%, respectively, over the first
quarter of 2001. These increases were primarily due to increased core portfolio
revenues and operating income. Comparing those industrial distribution centers
owned by WRIT for the entire first quarter of 2000 and 2001, revenue and
operating income increased by 12.8% and 15.8%, respectively. These increases in
revenues and operating income were primarily due to increased rental rates and
occupancy. Occupancy rates improved significantly to 98.4% in the first quarter
of 2001 from 95.4% in the first quarter of 2000. This operating income increase
was partially offset by a $0.2 million increase in real estate expenses during
first quarter 2001.
For the first quarter of 2001, WRIT's multifamily revenues and operating income
increased 4.6% and 7.1%, respectively, over the first quarter of 2000. These
increases were primarily due to increased rental rates in WRIT's core portfolio.
Comparing those apartment buildings owned by WRIT for the entire first quarter
of 2000 and 2001, revenue and operating income increased by 7.5% and 4.6%,
respectively. Real estate expenses remained essentially unchanged, increasing
0.4% during first quarter 2001. Occupancy rates decreased from 97.1% in the
first quarter of 2000 to 94.9% in the first quarter of 2001.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the first quarter of 2001, WRIT's retail center revenues and operating
income increased 6.1% and 8.7%, respectively, over the first quarter of 2000.
These increases were primarily due to increased core portfolio revenues and
operating income, offset in part 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 first quarter of 2000 and 2001, revenue and
operating income increased by 9.3% and 10.8%, respectively. These increases were
primarily due to increased rental rates and an increase in occupancy from 94.9%
in the first quarter of 2000 to 96.0% in the first quarter of 2001. Operating
income also increased due to a 2.6% decrease in real estate expenses during
first quarter 2001, primarily as a result of the Prince William and Clairmont
Center disposals.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended March 31,
- --------------------------------------------------------------------------------
2001 Compared to the Three Months Ended March 31, 2000
- ------------------------------------------------------
Real estate expenses increased $0.9 million or 9.3% to $10.2 million for the
first quarter of 2001 as compared to $9.4 million for the first quarter of 2000.
This increase was primarily due to expenses relating to $26.5 million of
properties acquired in 2000, higher real estate taxes and a 5.9% increase in
core portfolio operating expense, partially offset by the impact of the $6.2
million of properties sold throughout 2000.
Depreciation and amortization expense increased $0.8 million or 14.4% to $6.2
million for the first quarter of 2001 as compared to $5.4 million for the first
quarter of 2000. This was primarily due to the impact of $26.5 million of
acquisitions throughout 2000, and 2000 and year to date 2001 capital and tenant
improvement expenditures, which totaled $16.3 million and $3.2 million,
respectively. This amount was partially offset by dispositions of $6.2 million
throughout 2000.
Total interest expense was $6.7 million for the first quarter of 2001 as
compared to $6.1 million for the first quarter of 2000. This increase was
primarily attributable to the issuance of $55.0 of medium term notes in
November 2000, net of interest savings on the line of credit borrowings paid off
with the proceeds of this note. For the first quarter of 2001, notes payable
interest expense was $5.0 million, mortgage interest expense was $1.6 million
and lines of credit interest expense was $0.1 million. For the first quarter of
2000, notes payable interest expense was $3.9 million, mortgage interest expense
was $1.6 million and lines of credit interest expense was $0.6 million.
General and administrative expenses decreased $0.1 million to $1.7 million for
the first quarter of 2001 as compared to $1.8 million for the first quarter of
2000. The change was primarily attributable to a reduction in compensation
related expenses, principally related to changes in executive compensation
structure, offset by the amortization of internal leasing commissions and
overhead costs. For the first quarter of 2001, general and administrative
expenses as a percentage of revenue were 4.7% as compared to 5.6% for the first
quarter of 2000.
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
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
On April 24, 2001, WRIT completed a public offering of 2,300,000 Shares of
Beneficial Interest priced at $22.15 per share. $43.0 million of the $48.2
million from the sale of the shares was used to repay the $43.0 million
borrowing related to the acquisition of One Central Plaza. On May 3, 2001, the
underwriter exercised an over-allotment option to increase the offering by an
additional 235,000 shares at $22.15 per share. This additional sale closed on
May 8, 2001 and resulted in net proceeds of $4.9 million to the Trust.
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 6). None of the $351.1 million total debt outstanding at March
31, 2001 was at a floating rate. WRIT estimates that a 200 basis point increase
in interest rates would result in less than a 1.5% reduction in earnings.
WRIT has line of credit commitments in place from commercial banks for up to $75
million which bear interest at an adjustable spread over LIBOR based on the
Trust's interest coverage ratio and public debt rating. As of March 31, 2001,
WRIT had $0 outstanding under its lines of credit. WRIT acquired three improved
properties and the land under Munson Hill Towers in 2000 and one property in
2001 (as of March 31) for total acquisition costs of $26.5 million and $1.5
million, respectively. The 2000 acquisitions were financed through line of
credit advances and the use of the proceeds from the property sales in February
2000 and August 2000. The 2001 acquisition was funded through income from
operations (see Note 8 for further acquisition discussion).
On April 21, 2001, WRIT acquired One Central Plaza for a purchase price of $44.4
million. This 274,000 square foot office space was financed through a $43.0
million advance on the unsecured lines of credit discussed in Note 5.
Cash flow from operating activities totaled $13.7 million for the first three
months of 2001, as a result of net income before gain on sale of real estate of
$10.7 million, depreciation and amortization of $6.2 million, increases in other
assets of $1.6 million and decreases in liabilities (other than mortgage note,
senior notes and lines of credit payable) of $1.7 million. The majority of the
increase in cash flow from operating activities was primarily due to increased
rental rates and increased occupancies.
Net cash used in investing activities for the first three months of 2001 was
$3.7 million, including real estate acquisitions of $1.5 million and capital
improvements to real estate of $2.1 million.
Net cash used in financing activities for the first three months of 2001 was
$11.3 million, principal repayments on the mortgage notes payable of $0.2
million and $11.2 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.
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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:
Three months ended
March 31, Year Ended December 31,
------------------ -----------------------
2001 2000 1999 1998
---- ---- ---- ----
Earnings to fixed charges 2.61x 2.63x 2.61x 3.01x
Debt service coverage 3.42x 3.40x 3.42x 3.84x
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.
The ratios of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations plus fixed charges. Fixed charges consist of interest expense,
including interest costs capitalized, and the amortized costs of debt issuance.
ITEM 3: Quantitative and Qualitative Disclosures About 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 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 2000 Form 10-K.
17
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
(12) Computation of Ratios
(b) Reports on Form 8-K
1. February 27, 2001 - Report pursuant to Item 5 on the
release of the Trust's December 31, 2000 earnings
information.
2. April 23, 2001 - Report pursuant to Item 5 on the release
of the Trust's March 31, 2001 earnings information.
18
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: May 14, 2001
19