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, 2001 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 Number)
incorporation or organization)
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 38,328,991
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO ____
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1
WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
Page
----
Part I: Financial Information
---------------------
Item l. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 22
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)
June 30, December 31,
2001 2000
----------- -----------
Assets
Real estate at cost $ 748,951 $ 698,513
Accumulated depreciation (112,757) (100,906)
--------- ---------
Total investment in real estate 636,194 597,607
Cash and cash equivalents 22,445 6,426
Rents and other receivables, net of allowance for doubtful
accounts of $2,146 and $1,743, respectively 11,982 9,796
Prepaid expenses and other assets 17,765 19,587
--------- ---------
$ 688,386 $ 633,416
========= =========
Liabilities
Accounts payable and other liabilities $ 14,660 $ 13,048
Advance rents 3,256 3,270
Tenant security deposits 6,108 5,624
Mortgage notes payable 85,851 86,260
Notes payable 265,000 265,000
--------- ---------
374,875 373,202
--------- ---------
Minority interest 1,584 1,558
--------- ---------
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000 shares authorized:
38,329 and 35,740 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively 383 357
Additional paid-in capial 311,544 258,299
--------- ---------
311,927 258,656
--------- ---------
$ 688,386 $ 633,416
========= =========
See accompanying notes to financial statements
3
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
------- --------- -------- -------
Real estate rental revenue 37,418 33,350 72,743 65,285
Real estate expenses (10,756) (9,633) (20,991) (19,005)
-------- -------- ------- -------
Operating income 26,662 23,717 51,752 46,280
Depreciation and amortization (6,680) (5,624) (12,894) (11,054)
-------- -------- ------- -------
Income from real estate 19,982 18,093 38,858 35,226
Other income 750 242 949 391
Interest expense (6,771) (6,311) (13,447) (12,401)
General and administrative (1,567) (2,061) (3,239) (3,842)
-------- -------- ------- -------
Income before gain on sale of real estate 12,394 9,963 23,121 19,374
-------- -------- ------- -------
Gain on sale of real estate - - - 1,498
-------- -------- ------- -------
Net Income 12,394 9,963 23,121 20,872
======== ======== ======= =======
Per share information based on the
weighted average number
of shares outstanding
Shares -- Basic 37,668 35,734 36,728 35,734
Shares -- Diluted 38,072 35,810 37,118 35,810
Income before gain on sale of real estate - Basic $0.33 $0.28 $0.63 $0.54
======== ======== ======= =======
Income before gain on sale of real estate - Diluted $0.33 $0.28 $0.63 $0.54
======== ======== ======= =======
Net income per share-- Basic $0.33 $0.28 $0.63 $0.58
======== ======== ======= =======
Net income per share-- Diluted $0.33 $0.28 $0.63 $0.58
======== ======== ======= =======
Dividends paid $0.3325 $0.3125 $0.6450 $0.6050
======== ======== ======= =======
See accompanying notes to financial statements
4
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED June 30, 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 23,121 23,121
Dividends (23,926) (23,926)
Share Offering 2,535 25 53,094 53,119
Share Options Exercised
and Share Grants 54 1 956 957
------ ---- -------- --------
Balance, June 30, 2001 38,329 $383 $311,544 $311,927
====== ==== ======== ========
See accompanying notes to financial statements
5
WASHINGTON REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
2001 2000
----------------- -----------------
Cash Flow From Operating Activities
Net income $23,121 $20,872
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of real estate - (1,498)
Depreciation and amortization 12,894 11,054
(Increases) decreases in other assets (1,336) 1,027
Increases in other liabilities 2,815 2,269
---------------- ----------------
Net cash provided by operating activities 37,494 33,724
---------------- ----------------
Cash Flow From Investing Activities
Capital improvements to real estate (4,391) (7,757)
Non-real estate capital improvements (71) (150)
Real estate acquisitions (46,029) (9,193)
Cash received for sale of real estate - 2,457
---------------- ----------------
Net cash used in investing activities (50,491) (14,643)
---------------- ----------------
Cash Flow From Financing Activities
Share offering 53,094 -
Dividends paid (23,926) (21,619)
Borrowings - Lines of credit 43,000 7,000
Repayments - Lines of credit (43,000) -
Principal payments - Mortgage note payable (409) (378)
Share options exercised 257 183
---------------- ----------------
Net cash provided (used) by financing activities 29,016 (14,814)
---------------- ----------------
Net increase in cash and cash equivalents 16,019 4,267
Cash and cash equivalents at beginning of year 6,426 4,716
---------------- ----------------
Cash and cash equivalents at end of period $22,445 $8,983
================ ================
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid for interest during the six months ended June 30, 2001 $12,999 $11,981
================ =================
See accompanying notes to financial statements
6
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 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
7
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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 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.
8
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 3: REAL ESTATE INVESTMENTS
- -------------------------------
WRIT's real estate investment portfolio, at cost, consists of properties located
in Maryland, Washington, D.C. and Virginia as follows:
June 30, 2001
(in thousands)
--------------
Office buildings $431,215
Industrial centers 118,254
Multifamily 104,428
Retail centers 95,054
--------
$748,951
========
WRIT acquired the following properties during 2001:
Property Property Rentable Square Purchase Contract Cost
Acquisition Date Name Type Feet Units (in thousands)
- -------------------------- ------------------ -------------- ----------------- ------------- ------------------------
February 15, 2001 1611 N. Clarendon Multifamily 10,640 14 $1,500
April 19, 2001 One Central Plaza Office 274,138 N/A $44,400
NOTE 4: MORTGAGE NOTES PAYABLE
- -------------------------------
On August 22, 1995, WRIT assumed a $7.8 million mortgage note payable as partial
consideration for its acquisition of Frederick County Square retail center. The
mortgage bears interest at 9 percent. Principal and interest are payable monthly
until January 1, 2003, at which time all unpaid principal and interest are
payable in full.
On November 30, 1998, WRIT assumed a $9.2 million mortgage note payable and a
$12.4 million mortgage note payable as partial consideration for its acquisition
of Woodburn Medical Park I and II. Both mortgages bear interest at 7.69 percent
per annum. Principal and interest are payable monthly until September 15, 2005,
at which time all unpaid principal and interest are payable in full.
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
JUNE 30, 2001
Annual maturities of principal as of June 30, 2001 are as follows:
(in thousands)
2001 $ 425
2002 903
2003 7,368
2004 820
2005 26,335
Thereafter 50,000
--------
Total $ 85,851
========
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
- ------------------------------------------
As of June 30, 2001, WRIT had two unsecured credit commitments in the amount of
$50 million and $25 million, with no amounts 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 June
30, 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.
10
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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 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 June 30, 2001.
NOTE 7: SEGMENT INFORMATION
- ---------------------------
WRIT has four reportable segments: Office Buildings, Industrial Centers,
Multifamily Properties and Retail Centers. Office Buildings represent 54 percent
of real estate rental revenue and provide office space for various types of
businesses. Industrial Centers represent 15 percent of real estate rental
revenue and are used for warehousing and distribution. Multifamily Properties
represent 18 percent of real estate rental revenue and provide housing for
families throughout the Washington Metropolitan area. Retail 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
JUNE 30, 2001
(in thousands)
--------------
Three Months Ended June 30, 2001
--------------------------------
Office Industrial Multifamily Retail Corporate and
Buildings Centers Properties Centers Other Consolidated
------------ --------------- ---------------- -------------- --------------- ---------------
Real estate rental revenue $ 20,402 $ 5,435 $ 6,796 $ 4,785 $ - $ 37,418
Real estate expenses (6,004) (1,195) (2,489) (1,068) - (10,756)
------------ --------------- ---------------- -------------- --------------- ---------------
Operating income 14,398 4,240 4,307 3,717 - 26,662
Depreciation and amortization (3,885) (1,024) (959) (584) (258) (6,680)
------------ --------------- ---------------- -------------- --------------- ---------------
Income from real estate 10,543 3,216 3,348 3,133 (258) 19,982
Other income - - - - 750 750
Interest expense (400) - (1,079) (156) (5,136) (6,771)
General and administrative - - - - (1,567) (1,567)
------------ --------------- ---------------- -------------- --------------- ---------------
Income before gain on sale of
real estate $ 10,143 $ 3,216 $ 2,269 $ 2,977 $(6,211) $ 12,394
============ =============== ================ ============== =============== ===============
Capital investments $ 45,978 $ 396 $ 329 $ 98 $ 17 $ 46,818
============ =============== ================ ============== =============== ===============
Total assets $384,747 $107,079 $ 79,673 $81,843 $35,043 $688,385
============ =============== ================ ============== =============== ===============
(in thousands)
--------------
Three Months Ended June 30, 2000
--------------------------------
Office Industrial Multifamily Retail Corporate and
Buildings Centers Properties Centers Other Consolidated
--------------- --------------- ---------------- -------------- --------------- ---------------
Real estate rental revenue $ 17,399 $ 4,899 $ 6,462 $ 4,590 $ - $ 33,350
Real estate expenses (5,296) (956) (2,375) (1,006) - (9,633)
--------------- --------------- ---------------- -------------- --------------- ---------------
Operating income 12,103 3,943 4,087 3,584 - 23,717
Depreciation and amortization (3,192) (959) (855) (618) - (5,624)
--------------- --------------- ---------------- -------------- --------------- ---------------
Income from real estate 8,911 2,984 3,232 2,966 - 18,093
Other income - - - - 242 242
Interest expense (409) - (1,083) (160) (4,659) (6,311)
General and administrative - - - - (2,061) (2,061)
--------------- --------------- ---------------- -------------- --------------- ---------------
Net income before gain on sale
of real estate $ 8,502 $ 2,984 $ 2,149 $ 2,806 $(6,478) $ 9,963
=============== =============== ================ ============== =============== ===============
Capital investments $ 9,177 $ 925 $ 1,043 $ 288 $ 50 $ 11,483
=============== =============== ================ ============== =============== ===============
Total assets $327,102 $105,703 $ 79,023 $83,233 $21,747 $616,808
=============== =============== ================ ============== =============== ===============
12
WASHINGTON REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(in thousands)
--------------
Six Months Ended June 30, 2001
------------------------------
Office Industrial Multifamily Retail Corporate and
Buildings Centers Properties Centers Other Consolidated
--------------- --------------- ---------------- -------------- --------------- ---------------
Real estate rental revenue $ 39,229 $10,433 $13,492 $ 9,589 $ - $ 72,743
Real estate expenses (11,680) (2,412) (4,838) (2,061) - (20,991)
-------- ------- ------- ------- -------- --------
Operating income 27,549 8,021 8,654 7,528 - 51,752
Depreciation and amortization (7,308) (2,044) (1,894) (1,165) (483) (12,894)
-------- ------- ------- ------- -------- --------
Income from real estate 20,241 5,977 6,760 6,363 (483) 38,858
Other income - - - - 949 949
Interest expense (736) - (2,159) (313) (10,238) (13,447)
General and administrative - - - - (3,239) (3,239)
-------- ------- ------- ------- -------- --------
Net income before gain on sale
of real estate $ 19,505 $ 5,977 $ 4,600 $ 6,050 $(13,011) $ 23,121
======== ======= ======= ======= ======== ========
Capital investments $ 48,694 $ 323 $ 2,259 $ 161 $ 71 $ 51,508
======== ======= ======= ======= ======== ========
(in thousands)
--------------
Six Months Ended June 30, 2000
------------------------------
Office Industrial Multifamily Shopping Corporate and
Buildings Centers Properties Centers Other Consolidated
--------------- --------------- ---------------- -------------- --------------- ---------------
Real estate rental revenue $ 34,094 $ 9,214 $12,863 $ 9,114 $ - $ 65,285
Real estate expenses (10,256) (1,972) (4,708) (2,068) - (19,005)
-------- ------- ------- ------- -------- --------
Operating income 23,838 7,242 8,155 7,046 - 46,280
Depreciation and amortization (6,262) (1,869) (1,700) (1,223) - (11,054)
-------- ------- ------- ------- -------- --------
Income from real estate 17,576 5,373 6,455 5,823 - 35,226
Other income - - - - 391 391
Interest expense (752) - (2,166) (321) (9,162) (12,401)
General and administrative - - - - (3,842) (3,842)
-------- ------- ------- ------- -------- --------
Net income before gain on sale
of real estate $ 16,824 $ 5,373 $ 4,289 $ 5,502 $(12,613) $ 19,374
======== ======= ======= ======= ======== ========
Capital investments $ 11,616 $ 1,818 $ 1,602 $ 1,905 $ 184 $ 17,124
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, 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
- -------------------------------------------------------------------
June 30, 2001 Compared to the Three Months Ended June 30, 2000
- --------------------------------------------------------------
Total revenues for the second quarter of 2001 increased 12.2% ($4.0 million) to
$37.4 million from $33.4 million in the second quarter of 2000. Operating income
increased 12.4% ($3.0 million) to $26.7 million from $23.7 million in the second
quarter of 2000.
For the second quarter of 2001, WRIT's office buildings had increases of 17.3%
in revenues and 19.0% in operating income, respectively, over the second quarter
of 2000. These increases were primarily due to increased core portfolio revenues
and operating income, the acquisition of Wayne Plaza in May 2000, the
acquisition of Courthouse Square in October 2000 and the acquisition of One
Central Plaza in April 2001. Comparing those office buildings owned by WRIT for
the entire second quarters of 2000 and 2001, revenue and operating income
increased 4.2% and 5.9%, 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 (20.8%) in real estate expenses during second quarter 2001,
principally due to higher operating expenses and higher real estate taxes.
Occupancy levels increased to 98.1% in second quarter 2001 from 97.0% in second
quarter 2000.
For the second quarter of 2001, WRIT's industrial distribution center revenues
and operating income increased 10.9% and 7.5%, respectively, over the second
quarter of 2000. These increases were primarily due to increased core portfolio
revenues and operating income. Comparing those industrial distribution centers
owned by WRIT for the entire second quarter of 2000 and 2001, revenue and
operating income increased by 5.2% and 11.1%, respectively. These increases in
revenues and operating income were primarily due to increased rental rates and
occupancy across the sector. This operating income increase was partially offset
by a $0.2 million (25.1%) increase in real estate expenses during second quarter
2001, principally due to higher common area maintenance expenses, resulting from
higher occupancy. Occupancy rates improved significantly to 99.1% in the second
quarter of 2001 from 96.7% in the second quarter of 2000.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the second quarter of 2001, WRIT's multifamily property revenues and
operating income increased 5.1% and 5.4%, respectively, over the second quarter
of 2000. These increases were primarily due to increased rental rates in WRIT's
core portfolio, offset in part by decreased occupancies. Comparing those
multifamily properties owned by WRIT for the entire second quarter of 2000 and
2001, revenue and operating income increased by 8.5% and 5.5%, respectively.
Real estate expenses remained essentially unchanged, increasing 0.1 million
(4.8%) during first quarter 2001. Occupancy rates decreased from 97.2% in the
second quarter of 2000 to 94.6% in the second quarter of 2001.
For the second quarter of 2001, WRIT's retail center revenues and operating
income increased 4.3% and 3.7%, respectively, over the second quarter of 2000.
These increases were primarily due to increased core portfolio revenues and
operating income, offset in part by the August 2000 sale of Clairmont Center.
Comparing those retail centers owned by WRIT for the entire second quarter of
2000 and 2001, revenue and operating income increased by 6.6% and 7.1%,
respectively. These increases were primarily due to increased rental rates,
increased tenant pass through expense recoveries and an increase in occupancy
from 94.4% in the second quarter of 2000 to 95.0% in the second quarter of 2001.
REAL ESTATE RENTAL REVENUE AND OPERATING INCOME: Six Months Ended
- -----------------------------------------------------------------
June 30, 2001 Compared to the Six Months Ended June 30, 2000
- ------------------------------------------------------------
Total revenues for the first six months of 2001 increased 11.4% ($7.4 million)
to $72.7 million from $65.3 million for the first six months of 2000. Operating
income increased 11.8% ($5.5 million) to $51.8 million for the first six months
of 2001 from $46.3 million for the first six months of 2000.
For the first six months of 2001, WRIT's office buildings had increases of 15.1%
in revenues and 15.6% in operating income, respectively, over the first six
months of 2000. These increases were primarily due to increased core portfolio
revenues and operating income, the acquisition of Wayne Plaza in May 2000, the
acquisition of Courthouse Square in October 2000 and the acquisition of One
Central Plaza in April 2001. Comparing those office buildings owned by WRIT for
the entire first six months of 2000 and 2001, revenue and operating income
increased 5.0% and 6.1%, respectively. These increases in revenues and operating
income were primarily due to increases in rental rates and tenant pass through
expense recoveries across the sector. Operating income was partially offset by
an increase of $1.4 million (13.9%) in real estate expenses in the first six
months of 2001, principally due to higher operating expenses and higher real
estate taxes.
For the first six months of 2001, WRIT's industrial distribution center revenues
and operating income increased 13.2% and 10.8%, respectively, over the first six
months of 2000. These increases were primarily due to increased core portfolio
revenues and operating income across the sector. Comparing those industrial
distribution centers owned by WRIT for the entire first six months of 2000 and
2001, revenue and operating income increased by 8.7% and 13.3%, 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 (22.3%) in
real estate expenses in the first six months of 2001, principally due to higher
operating expenses.
For the first six months of 2001, WRIT's multifamily property revenues and
operating income increased 4.9% and 6.1%, respectively, over the first six
months of 2000. These increases were primarily due to increased rental rates
across the sector, offset in part by decreased occupancies. Comparing those
multifamily properties owned by WRIT for the entire first six months of 2000 and
2001, revenue and operating income increased by 8.0% and 5.1%, respectively.
Operating income was partially offset by an increase of $0.1 million (2.8%) in
real estate expenses in the first six months of 2001.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the first six months of 2001, WRIT's retail center revenues increased 5.2%
and operating income increased 6.8%, respectively, over the first six months of
2000. These increases were primarily due to increased rental rates, offset in
part by the sale of Clairmont Center in August 2000. Comparing those shopping
centers owned by WRIT for the entire first six months of 2000 and 2001, revenue
and operating income increased by 7.9% and 8.9%, respectively. These increases
were primarily due to increased rental rates and increased tenant pass through
expense recoveries. Operating income also increased due to a 0.3% decrease in
real estate expenses in the first six months of 2001.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Three Months Ended
- -----------------------------------------------------------------------
June 30, 2001 Compared to the Three Months Ended June 30, 2000
- --------------------------------------------------------------
Real estate expenses increased $1.1 million or 11.7% to $10.7 million for the
second quarter of 2001 as compared to $9.6 million for the second quarter of
2000. This increase was primarily due to expenses relating to $26.5 million of
properties acquired in 2000, $46.0 million of properties acquired in 2001,
higher real estate taxes and a 4.3% increase in core portfolio operating
expenses, partially offset by the impact of the $6.2 million of properties sold
throughout 2000.
Depreciation and amortization expense increased $1.1 million or 18.8% to $6.7
million for the second quarter of 2001 as compared to $5.6 million for the
second quarter of 2000. This was primarily due to the impact of $26.5 million of
acquisitions throughout 2000, $46.0 million of properties acquired in 2001 and
2000 and 2001 capital and tenant improvement expenditures, which totaled $16.3
million and $4.5 million, respectively. This amount was partially offset by
property dispositions of $6.2 million throughout 2000.
Total interest expense was $6.8 million for the second quarter of 2001 as
compared to $6.3 million for the second quarter of 2000. This increase was
primarily attributable to the issuance of $55.0 million 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 second 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 second quarter of
2000, notes payable interest expense was $3.9 million, mortgage interest expense
was $1.7 million and lines of credit interest expense was $0.7 million.
General and administrative expenses decreased $0.5 million to $1.6 million for
the second quarter of 2001 as compared to $2.1 million for the second quarter of
2000. The change was primarily attributable to higher management fees at the
property level resulting in a greater offset to General and Administrative and a
decrease in administrative depreciation due to full amortization of computer
hardware and software. For the second quarter of 2001, general and
administrative expenses as a percentage of revenue were 4.2% as compared to 6.2%
for the second quarter of 2000.
Other Income increased $0.5 million to $0.7 million for the second quarter of
2001 as compared to $0.2 million for the second quarter of 2000. The increase
was attributable to a utility divestiture sharing distribution.
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS: Six Months Ended
- ---------------------------------------------------------------------
June 30, 2001 Compared to the Six Months Ended June 30, 2000
- ------------------------------------------------------------
Real estate expenses increased $2.0 million or 10.5% to $21.0 million for the
first six months of 2001 as compared to $19.0 million for the first six months
of 2000. This increase was primarily due to expenses relating to properties
acquired in 2000 and 2001 as well as increased core portfolio utilities, repairs
and maintenance, operating services and common area maintenance expenses in 2001
as compared to 2000.
Depreciation and amortization expense increased $1.8 million or 16.7% to $12.9
million for the first six months of 2001 as compared to $11.1 million for the
first six months of 2000. This was primarily due to 2000 and year to date 2001
acquisitions of $26.5 million and $46.0 million, respectively, and 2000 and year
to date 2001 capital and tenant improvement expenditures which totaled $17.7
million and $4.5 million, respectively.
Total interest expense was $13.4 million for the first six months of 2001 as
compared to $12.4 million for the second quarter of 2000. This increase was
primarily attributable to the issuance of $55.0 million 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 six months of 2001, notes payable
interest expense was $10.1 million, mortgage interest expense was $3.2 million
and lines of credit interest expense was $0.2 million. For the first six months
of 2000, notes payable interest expense was $7.9 million, lines of credit
interest expense was $3.2 million and mortgage interest expense was $1.3
million.
General and administrative expenses decreased $0.6 million to $3.2 million for
the first six months of 2001 as compared to $3.8 million for the first six
months of 2000. The change was primarily attributable to higher management fees
resulting in a greater offset to General and Administrative expenses, decreased
consulting fees and a decrease in administrative depreciation due to full
amortization of computer hardware and software. For the first six months of
2001, general and administrative expenses as a percentage of revenue were 4.5%
as compared to 5.9% for the first six months of 2000.
Other Income increased $0.5 million to $0.9 million for the first six months of
2001 as compared to $0.4 million for the first six months quarter of 2000. The
increase was attributable to a utility divestiture sharing distribution.
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.
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. The sale of these
additional shares closed on May 8, 2001 and resulted in net proceeds of $4.9
million to the Trust.
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
WRIT anticipates that over the near term, future interest rate increases would
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 $350.9 million total debt outstanding at June 30, 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 June 30, 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 two properties in
2001 (as of June 30) for total acquisition costs of $26.5 million and $46.1
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 acquisitions were funded through income from
operations, line of credit advances and proceeds of public offering.
Cash flow from operating activities totaled $37.5 million for the first six
months of 2001, as a result of net income of $23.1 million, depreciation and
amortization of $12.9 million, decrease in other assets of $1.3 million and
increases in liabilities (other than mortgage note, senior notes and lines of
credit payable) of $2.8 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 six months of 2001 was $50.5
million, including real estate acquisitions of $46.0 million and capital
improvements to real estate of $4.4 million.
Net cash used in financing activities for the first three months of 2001 was
$29.0 million, including principal repayments on the mortgage notes payable of
$0.4 million and $23.9 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 WRIT has the liquidity and the capital resources
necessary to meet all of its known obligations and to make additional property
acquisitions and capital improvements when appropriate to enhance long-term
growth.
RATIOS OF EARNINGS TO FIXED CHARGES AND DEBT SERVICE COVERAGE
- -------------------------------------------------------------
The following table sets forth the Trust's ratios of earnings to fixed charges
and debt service coverage for the periods shown:
Six months ended
June 30, Year Ended December 31,
2001 2000 1999 1998
---- ---- ---- ----
Earnings to fixed charges 2.72x 2.63x 2.61x 3.01x
Debt service coverage 3.52x 3.40x 3.42x 3.84x
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Debt service coverage is computed by dividing income before (a) gain on sale of
real estate; (b) interest income; (c) interest expense; and (d) depreciation and
amortization by the sum of interest expense, including interest costs
capitalized, and the amortized costs of debt issuance plus mortgage principal
amortization.
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.
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
At WRIT's annual meeting of the shareholders on May 22, 2001, the
following members were elected to the Board of Trustees for a period of
three years:
Affirmative Votes Negative Votes
----------------------- --------------------------
Mr. Edmund B. Cronin, Jr. 30,143,201 (95%) 1,450,008 (5%)
Mr. John P. McDaniel 31,220,744 (99%) 372,465 (1%)
Mr. David M. Osnos 31,081,355 (98%) 511,854 (2%)
Mr. Cronin, Mr. McDaniel and Mr. Osnos were re-elected as Trustees. Trustees
whose term of office continued after the meeting were Ms. Susan J. Williams, Mr.
Clifford M. Kendall, Mr. John M. Derrick and Mr. Charles T. Nason.
The shareholders approved the WRIT 2001 Stock Option Plan to provide shares
available for option grants with 28,911,314 votes in favor (representing 92% of
voting shares), 2,062,070 votes opposed (representing 7% of voting shares) and
619,825 votes abstained (1% of voting shares).
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
20
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.
3. July 19, 2001 - Report pursuant to Item 5 on the release of the Trust's
June 30, 2001 earnings information.
21
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,
Managing Director,
Accounting and Administration
Date: August 14, 2001
22