WASHINGTON REAL ESTATE INVESTMENT TRUST
ANNUAL REPORT 2001
[GRAPHIC]
VALUE 36 consecutive years of
increased earnings per share
GROWTH 31 consecutive years of
increased dividends per share
PERFORMANCE 29 consecutive
years of increased funds from
operations per share
MISSION STATEMENT
Washington Real Estate Investment Trust, founded in 1960 and headquartered in
Rockville, Maryland, invests in a diversified range of income-producing property
types. Our purpose is to acquire and manage real estate investments in markets
we know well and protect our assets from single property-type value fluctuations
through diversified holdings. Our goal is to continue to safely increase
earnings and shareholder value.
SELECTED FINANCIAL AND OPERATING DATA
IN MILLIONS, EXCEPT FULLY DILUTED PER SHARE AMOUNTS
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
FOR THE YEAR
Real Estate Revenue $ 148 $ 135 $ 119 $ 104 $ 79
Income before Gain
on Sale of Real Estate 48 42 36 34 30
Net Income 52 45 44 41 30
Funds from Operations 74 64 56 50 41
Cash Dividends Paid 50 44 41 40 36
Average Shares Outstanding 39 36 36 36 33
PER FULLY DILUTED COMMON SHARE
Income before Gain
on Real Estate $ 1.27 $ 1.16 $ 1.02 $ .96 $ .90
Net Income 1.38 1.26 1.24 1.15 .90
Funds from Operations 1.96 1.79 1.57 1.39 1.23
Cash Dividends Paid 1.31 1.23 1.16 1.11 1.07
AT YEAR END
Total Assets $ 708 $ 632 $ 608 $ 559 $ 469
Total Debt 360 351 330 283 203
Shareholders' Equity 324 259 257 254 252
[PHOTO]
TO OUR SHAREHOLDERS
What a year! The high-technology implosion, major national retail chains filing
for bankruptcy, September 11, 2001, continued decline in the economy,
international unrest, poor earnings reports with guarded future guidance, all
topped off with the Enron affair.
WRIT has weathered this storm quite well. Our total return for the year was
11.25%. But WRIT also has been negatively affected by the declining economy. It
slowed our growth from high double-digit earnings and funds from operations per
share to a very respectable 9.5% increase over the year 2000. Our financial
statement continues to be one of the strongest in the industry. WRIT continues
to retain an A- and Baa1 rating from Standard & Poor's and Moody's,
respectively. I feel very comfortable that our geographic focus in the
Washington-Baltimore region, property-type diversification, and solid balance
sheet will enable us to continue in 2002 to grow our earnings and dividends in
spite of the soft economy.
The recent Enron event has led to increased concern about accounting
practices and reliable earnings reports. Since Arthur Andersen, Enron's auditor,
is our auditor, your Trustees and Audit Committee have had in-depth discussions
with Andersen's senior managers about the Enron affair and its implications for
WRIT. I can assure you, as Arthur Andersen told the Trustees, that management
has not applied any undue pressure on Arthur Andersen to take unusually
aggressive positions.
Arthur Andersen has been our auditor since 1996. Prior to that time, Price
Waterhouse, now known as PWC, was our auditor. We changed auditors because PWC
moved both their real estate audit and tax groups to Atlanta, Georgia. During
PWC's relocation, WRIT was assigned local PWC audit personnel unfamiliar with
real estate with assistance from the new head real estate office in Atlanta. We
found that arrangement unacceptable.
Consequently, we invited four of the Big Five accounting firms, including
PWC, to bid for our business. Both the Audit Committee and management were
involved in the process. We compared the firms by using a matrix developed by
WRIT, which included critical real estate and, in particular, REIT criteria. The
result of several presentations and meetings with each of the firms led us to
choose Arthur Andersen. WRIT has been very satisfied with the partners and
associates assigned to us.
Until recently, Arthur Andersen has enjoyed an impeccable reputation,
although from time to time they, like the other large national or international
auditing firms, have been cited and, indeed, fined for failure to properly
perform. The root of the problem begins with management seeking out ways to
demonstrate performance, usually through financial engineering. Often it is
through off-balance sheet transactions and trading cover-ups. WRIT has no
off-balance sheet transactions or technology ventures, nor are we in a trading
business. So what you see in our reporting is real. Unless there is some new
definitive reason to sever the relationship, WRIT plans to keep Arthur Andersen
as its auditor. In the meantime, WRIT is pursuing a contingency plan.
Similar to many professional economists, I expect that sometime in the late
third quarter and into the fourth quarter of 2002 we should begin seeing a real
recovery. Our diversified portfolio will continue to serve us well. It will
enable us to continue to extend our record of 36 consecutive years of increased
earnings per share, 31 consecutive years of increased dividends per share, and
29 years of increased funds from operations per share.
Please read the following pages to become better acquainted with your
company regarding its properties and financial performance.
Sincerely,
/s/ Edmund B. Cronin, Jr.
Edmund B. Cronin, Jr.
Chairman of the Board,
President and Chief Executive Officer
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the results:
year after year of performance
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WRIT VS. REIT INDUSTRY FFO PER SHARE GROWTH 1999-2001
FFO per share growth is the most widely recognized earnings performance measure
in the REIT industry. As reflected in the accompanying graph, WRIT has
outperformed industry average FFO per share growth by 616 basis points over the
last three years. The extent of WRIT's outperformance has increased in each of
the last three years. WRIT's average 12.3% FFO per share growth over the last
three years is one of the highest in the industry.
RATIO OF OPERATING EXPENSES AND G&A TO REVENUE
WRIT's ability to achieve its performance goals includes proactively managing
its operating expenses and G&A without diminishing quality service to its
tenants. The result, as the accompanying chart demonstrates, is that the ratio
of operating expenses and G&A to revenue continues to improve.
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RETURN ON INVESTED CAPITAL
In all businesses, return on invested capital (ROIC) is an extremely important
measure of company performance. WRIT's extraordinary performance is a result of
the effective deployment of capital combined with hands-on management, leasing,
and a value-added focus. WRIT's average 12.3% ROIC ranks fourth out of the 73
companies studied over the 19-quarter period. Over the past eight quarters, WRIT
ranks second out of 106 companies.
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QUARTER AVERAGES FROM FIRST QUARTER 1997
TO THIRD QUARTER 2001
SOURCE: CREDIT SUISSE FIRST BOSTON
PROPERTY-TYPE DIVERSIFICATION
The Greater Washington regional economy is unique, anchored by the very
significant federal government presence. With the federal government stability
driving continued private sector growth, the region can expect to experience one
of the most favorable economic environments in the United States. Owning a
diversified property-type portfolio enables WRIT to focus on the Greater
Washington region without the concerns of single property-type owners regarding
asset concentration and value fluctuations.
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the strategy:
disciplined asset management
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ACQUISITIONS
One Central Plaza is a 12-story, 274,000-square-foot building containing eight
levels of office space and four levels of parking, located at 11300 Rockville
Pike in Montgomery County, MD. It is located in the heart of the county across
from White Flint Mall, two blocks from the White Flint Metro Station and the
Nuclear Regulatory Commission, and within one mile of the National Naval Medical
Hospital and the National Institutes of Health. At the time of acquisition, the
property was 99.9% occupied by 62 tenants, a definite WRIT profile property with
its small tenant base and an "A" location.
WRIT paid $44.4 million or $162.04 per square foot for the building, which
was below replacement cost. The initial fiscal year 2002 yield is projected to
be 10.4%. In addition to synergies with other properties WRIT owns nearby,
substantial upside in rents is expected as both parking and office rental rates
are below the current market.
Sullyfield Commerce Center is comprised of two one-story with mezzanine flex
warehouse buildings containing 248,000 square feet. The property is located at
14320-14370 Sullyfield Circle, Chantilly, VA. The acquisition price was $21.6
million or $87.10 per square foot. This property complements other properties
WRIT owns within the Sullyfield Business Park. With this acquisition, WRIT now
owns 426,457 square feet in this 1.7-million-square-foot business park. At
acquisition, the property was 100% occupied by nine tenants. The average
in-place rents of those tenants expiring through 2005 are estimated to be 27%
below market. Initial fiscal year 2002 yield is expected to be 10.3%.
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DISPOSITIONS
In 2001, WRIT sold its former headquarters at 10400 Connecticut Avenue in
Kensington, MD, for $8,400,000. This sale resulted in a net gain of $4,296,000.
Since the commencement of WRIT's asset disposition program in 1998, WRIT has
sold 10 properties. In each case, the sale proceeds were reinvested, on a
tax-deferred basis, into properties that management believes will have
substantially stronger earnings potential in line with WRIT's long-term
objectives.
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There are four components to WRIT's capital improvement expenditures.
Acquisition-related--when acquiring assets, as part of WRIT's total acquisition
price an additional investment is expected for replacement of building
components, for example, a new roof or other major replacement needs and
deferred maintenance. Tenant improvements--generally when a tenant renews or a
new tenant commits for space, improvements to the space is expected to be paid
by WRIT. Expansions and major renovations--capital expenditures for new
construction, new facades, the retrofit of elevators and lobbies, and other
major projects. Recurring capital improvements--the combination of many smaller
capital expenditure items that must be spent to keep the properties in
first-class operating condition to meet tenant expectations.
Capital improvement expenditures are considered either accretive or
non-accretive. Although they both add value to a property over its lifetime,
current income may not increase in the short term. For investment analysis
purposes, it is necessary to identify the accretive versus the non-accretive
capital expenditures.
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[GRAPHIC] [GRAPHIC]
the portfolio:
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[GRAPHIC]
[GRAPHIC]
/\
- -- multi-family
1 Roosevelt Towers
Falls Church, Virginia
2 Park Adams
Arlington, Virginia
3 Munson Hill Towers
Falls Church, Virginia
4 Country Club Towers
Arlington, Virginia
5 3801 Connecticut Avenue, NW
Washington, D.C.
6 Walker House Apartments
Gaithersburg, Maryland
7 The Ashby at McLean
McLean, Virginia
8 Bethesda Hill Apartments
Bethesda, Maryland
9 Avondale Apartments
Laurel, Maryland
/\
\/ retail centers
1 Takoma Park Shopping Center
Takoma Park, Maryland
2 Westminster Shopping Center
Westminster, Maryland
3 Concord Centre
Springfield, Virginia
4 Wheaton Park Shopping Center
Wheaton, Maryland
5 Bradlee Shopping Center
Alexandria, Virginia
6 Chevy Chase Metro Plaza
Washington, D.C.
7 Montgomery Village Center
Gaithersburg, Maryland
8 The Shoppes of Foxchase
Alexandria, Virginia
9 Frederick County Square
Frederick, Maryland
10 The 800 Block of
South Washington Street
Alexandria, Virginia
[_] office buildings
1 1901 Pennsylvania Avenue, N.W.
Washington, D.C.
2 51 Monroe Street
Rockville, Maryland
3 7700 Leesburg Pike
Tysons Corner, Virginia
4 515 King Street
Alexandria, Virginia
5 The Saratoga Building
Rockville, Maryland
6 The Lexington Building
Rockville, Maryland
7 Brandywine Center
Rockville, Maryland
8 Tycon II
Tysons Corner, Virginia
9 Tycon III
Tysons Corner, Virginia
10 6110 Executive Boulevard
Rockville, Maryland
11 1220 19th Street, NW
Washington, D.C.
12 Maryland Trade Center I
Greenbelt, Maryland
13 Maryland Trade Center II
Greenbelt, Maryland
14 1600 Wilson Boulevard
Arlington, Virginia
15 7900 Westpark Drive
Tysons Corner, Virginia
16 Woodburn Medical Park I & II
Fairfax, Virginia
17 8230 Boone Boulevard
Tysons Corner, Virginia
18 600 Jefferson Plaza
Rockville, Maryland
19 1700 Research Boulevard
Rockville, Maryland
20 11821 Parklawn Drive
Rockville, Maryland
21 Wayne Plaza
Silver Spring, Maryland
22 Courthouse Square
Alexandria, Virginia
23 One Central Plaza
Rockville, Maryland
. industrial/flex properties
1 Capital Freeway Center
Washington, D.C. (sold 2/02)
2 Fullerton Industrial Park
Springfield, Virginia
3 Pepsi-Cola Distribution Center
Forestville, Maryland
4 Charleston Business Center
Rockville, Maryland
5 Tech 100 Industrial Park
Elkridge, Maryland
6 Crossroads Distribution Center
Elkridge, Maryland
7 Alban Business Center
Springfield, Virginia
8 The Earhart Building
Chantilly, Virginia
9 Ammendale Technology Park I
Beltsville, Maryland
10 Ammendale Technology Park II
Beltsville, Maryland
11 Pickett Industrial Park
Alexandria, Virginia
12 Northern Virginia Industrial Park
Lorton, Virginia
13 8900 Telegraph Road
Lorton, Virginia
14 Dulles South IV
Chantilly, Virginia
15 Sully Square
Chantilly, Virginia
16 Sullyfield Commerce Center
Chantilly, Virginia
the future:
Opportunities for adding value
Value is not created through acquisitions alone. There must be opportunities to
add value through creative thinking. With each new acquisition and the constant
review of existing properties, WRIT looks for added-value opportunities through
the use of excess density or favorable code modifications.
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1901 PENNSYLVANIA AVENUE, NW
Facade renovation (new curtain wall)
98,000 square feet
Completion expected May 2002
WRIT ROSSLYN CENTER
Use of excess density
211 apartments/10 townhouses
Completion expected late 2004
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[GRAPHIC]
WESTMINSTER SHOPPING CENTER
Renovation and re-tenanting
146,000 square feet
Completion expected May 2002
WALKER HOUSE
Mechanical building conversion
14 apartments
Completion expected 2004
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WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WRIT's discussion and analysis of its financial condition and results of
operations are based upon WRIT's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires WRIT to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, WRIT evaluates the
company's estimates, including those related to estimated useful lives of real
estate assets, cost reimbursement income, bad debts, contingencies and
litigation. WRIT bases the company's estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. There can be no assurance that actual results will not differ
from those estimates.
CRITICAL ACCOUNTING POLICIES
WRIT believes the following critical accounting policies affect the company's
more significant judgments and estimates used in the preparation of the
company's consolidated financial statements. WRIT's significant accounting
policies are described in Note 1 in the Notes to the Consolidated Financial
Statements.
Revenue Recognition
WRIT's revenue recognition policy is significant because revenue is a key
component of the company's results from operations. In addition, revenue
recognition determines the timing of certain expenses, such as leasing
commissions and bad debt. WRIT recognizes real estate rental revenue including
cost reimbursement income when earned in accordance with SFAS 13, "Accounting
for Leases". This requires WRIT to recognize rental revenue on a straight-line
basis over the term of the company's leases. WRIT maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of the
company's tenants to make required payments.
Estimated Useful Lives of Real Estate Assets
Real estate assets 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 over the
shorter of the useful life or the term of the lease. Maintenance and repair
costs are charged to expense as incurred.
Impairment Losses on Long-Lived Assets
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. If such carrying amount is in excess of the estimated projected
operating cash flows of the property, WRIT would recognize an impairment loss
equivalent to an amount required to adjust the carrying amount to the estimated
fair market value. There were no property impairments recognized during the
three-year period ending December 31, 2001.
RESULTS OF OPERATIONS
Real Estate Rental Revenue: 2001 Versus 2000
Total revenues for 2001 increased $13.7 million, or 10%, to $148.4 million from
$134.7 million in 2000. The percentage increase in real estate rental revenue
from 2000 to 2001 by property type was as follows:
Office Buildings 14%
Retail Centers 5%
Multifamily 5%
Industrial/Flex Properties 8%
During 2001, WRIT's office building revenues and operating income increased
by 14% and 15%, respectively, over 2000. These increases were primarily due to
the 2001 acquisition of One Central Plaza and 2000 acquisitions of Wayne Plaza
and Courthouse Square combined with increased rental rates for the sector,
offset in part by the 2001 sale of 10400 Connecticut Avenue. 3.5% of the real
estate portfolio revenues are attributable to WRIT's medical office buildings,
which WRIT considers to have less exposure to economic trends than typical
office buildings. Occupancy levels remained relatively unchanged.
Revenues and operating income in WRIT's core group of office buildings
(excluding 2001 and 2000 acquisitions and dispositions) increased 4% and 5%,
respectively, from 2000 to 2001. The increases in revenue and operating income
were a result of strong rental rate growth throughout the sector. WRIT's office
markets are strong and, while there is a significant amount of office
development underway in several submarkets, management anticipates that this
sector will continue to perform well in 2002. Economic occupancy rates for the
core group of office buildings averaged 98% for 2001 and 97% for 2000. Economic
occupancy is defined as gross rental revenue less vacancy losses.
Rental rate increases of 4% for the core group of office buildings were the
result of increases at nearly all of the properties. During 2001, WRIT executed
new leases for 515,000 square feet of office space at an average face rent
increase of 18% on a non-straight line basis.
During 2001, WRIT's retail center revenues and operating income increased
by 5% and 6%, respectively, over 2000. The change was primarily attributable to
increased rental rates across the sector offset in part by the 2000 sales of
Prince William Plaza and Clairmont retail center. Occupancy levels remained
relatively unchanged.
Retail center revenue and operating income in WRIT's core retail centers
(excluding 2001 and 2000 acquisitions and dispositions) increased 7% and 8%,
respectively, from 2000 to 2001 due primarily to the 8% growth in retail center
rental rates for this same group.
Rental rate increases of 8% for the core group of retail centers were the
result of increases at the majority of the properties. During 2001, WRIT
executed new leases for 188,000 square feet of retail space at an average face
rent increase of 64% on a non-straight line basis.
WRIT's multifamily revenues and operating income increased by 5% and 4%,
respectively, in 2001 over 2000. These increases were primarily due to increased
rental rates offset by declining occupancy levels across the sector.
9
WRIT's multifamily sector core group revenues and operating income
increased 4% and 6%, respectively. These increases were the result of the 7%
rental rate increase throughout the group. Economic occupancy rates for the core
group of multifamily averaged 95% in 2001 and 97% in 2000.
WRIT's industrial/flex property revenues and operating income increased by
8% and 6%, respectively, in 2001 over 2000. These increases were primarily due
to the 2001 acquisitions of Sullyfield Commerce Center as well as increased
rental rates and occupancy levels across the sector.
Revenues and operating income in WRIT's core group of industrial/ flex
properties (excluding 2001 and 2000 acquisitions and dispositions) increased 6%
and 8%, respectively, from 2000 to 2001 as a result of rental rate growth and
higher occupancy levels in 2001 compared to 2000. Economic occupancy rates for
the core group of industrial properties averaged 98% in 2001 compared to 97% in
2000.
Rental rate increases of 6% for the core group of industrial/flex centers
were the result of increases at the majority of the centers. During 2001, WRIT
executed new leases for 451,000 square feet of industrial space leases at an
average face rent increase of 9.3% on a non-straight line basis.
Real Estate Rental Revenue: 2000 Versus 1999
Total revenues for 2000 increased $15.8 million, or 13%, to $134.7 million from
$119.0 million in 1999. The percentage increase in real estate rental revenue
from 1999 to 2000 by property type was as follows:
Office Buildings 15%
Retail Centers 1%
Multifamily 14%
Industrial/Flex Properties 19%
During 2000, WRIT's office building revenues and operating income increased
by 15% and 17%, respectively, over 1999. These increases were primarily due to
increased rental rates for the sector, the 2000 acquisitions of Wayne Plaza and
Courthouse Square and the 1999 acquisitions of 600 Jefferson Plaza, 1700
Research Boulevard and Parklawn Plaza. These increases were offset in part by
the 1999 sales of Arlington Financial Center and 444 N. Frederick Road and a
slight decline in occupancy levels.
Revenues and operating income in WRIT's core group of office buildings
(excluding 2000 and 1999 acquisitions and dispositions) increased 9% and 10%,
respectively, from 1999 to 2000. These increases were a result of strong rental
rate growth with some moderate occupancy gains throughout the sector. Economic
occupancy rates for the core group of office buildings averaged 97% for 2000 and
1999.
Rental rate increases of 7% for the core group of office buildings were the
result of increases at nearly all of the properties. During 2000, WRIT executed
new leases for 758,000 square feet of office space at an average face rent
increase of 18% on a non-straight line basis.
During 2000, WRIT's retail center revenues and operating income increased
by 1% and 2%, respectively, over 1999. The increases were due to the 2000
acquisition of 833 S. Washington Street combined with increased rental rates and
occupancy levels, offset by the 2000 sales of Prince William Plaza and Clairmont
Center.
Revenues and operating income in WRIT's core retail centers (excluding 2000
and 1999 acquisitions and dispositions) increased 4% and 8%, respectively, from
1999 to 2000 due to increased rental rate growth. Retail center rental rates for
this same group increased 5% in 2000 over 1999.
Rental rate increases of 5% for the core group of retail centers were the
result of increases at the majority of the properties. During 2000, WRIT
executed new leases for 181,000 square feet of retail space at an average face
rent increase of 15% on a non-straight line basis.
WRIT's multifamily revenues and operating income increased by 14% and 19%,
respectively, in 2000 over 1999. These increases were primarily due to the 1999
acquisition of Avondale Apartments, combined with increased rental rates and
occupancy levels across the sector.
WRIT's multifamily sector core group revenues and operating income
(excluding the Avondale Apartments acquired in 1999) increased 7% and 11%,
respectively. These increases were the result of the 6% rental rate increase
throughout the group. Economic occupancy rates for the core group of multifamily
averaged 97% in both 2000 and 1999.
WRIT's industrial/flex property revenues and operating income increased by
19% and 21%, respectively, in 2000 over 1999. These increases were primarily due
to the 1999 acquisitions of Dulles South IV, Amvax and Sully Square, as well as
increased rental rates and occupancy levels primarily at Northern Virginia
Industrial Park, offset in part by the loss of revenues from the 1999 sales of
the Department of Commerce Industrial Center and V Street Distribution Center.
Revenues and operating income in WRIT's core group of industrial/ flex
properties (excluding 2000 and 1999 acquisitions and dispositions) increased 17%
and 10%, respectively, from 1999 to 2000 due to increased rental rate growth and
higher occupancy levels. Economic occupancy rates for the core group of
industrial properties averaged 96% in 2000 compared to 94% in 1999.
Rental rate increases of 4% for the core group of industrial/flex
properties were the result of increases at the majority of the centers. During
2000, WRIT executed new leases for 1,083,000 square feet of industrial space
leases at an average face rent increase of 19% on a non-straight line basis.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS
Real estate operating expenses as a percentage of revenue were 28% for both 2001
and 2000 and 30% for 1999. Real estate operating expenses increased to $42.1
million in 2001 from $38.3 million in 2000 and $35.3 million in 1999 in general
due to the acquisition of three real estate properties in 2001, three real
estate properties in 2000 and seven real estate properties in 1999 as well as
higher real estate taxes due to increases in assessed value throughout much of
the portfolio. Core portfolio operating expenses increased 4% in 2001 from 2000
and 5% in 2000 from 1999 due primarily to higher real estate taxes and property
management fees attributable to the
10
increase in real estate revenue. It should be noted property management fees are
passed through to tenants as part of the full service rent or as a contractual
pass through.
Depreciation and amortization expense increased $4.0 million in 2001 from
2000 due to total acquisitions of $67.8 million in 2001, $26.6 million of
acquisitions throughout 2000 and capital and tenant improvement expenditures, of
$14.0 million and $16.3 million for 2001 and 2000, respectively. Depreciation
and amortization expense increased $3.1 million in 2000 from 1999 due to $26.6
million of acquisitions in 2000, $61.8 million in acquisitions throughout 1999
and $16.3 million and $18.4 million, respectively, in 2001 and 2000 capital and
tenant improvement expenditures.
Interest expense increased $1.5 million in 2001 from 2000. The increase is
primarily attributable to the issuance of $55.0 million in medium-term notes in
November 2000 used to pay off WRIT's unsecured lines of credit and the
assumption of an $8.5 million mortgage in November 2001 with the acquisition of
Sullyfield Commerce Center. Interest expense increased $3.3 million in 2000 from
1999. The increase is primarily attributable to a higher average unsecured line
of credit balance outstanding combined with higher variable interest rates, the
issuance of $55.0 million in medium-term notes in November 2000 used to pay off
WRIT's unsecured lines of credit and the assumption of an $8.7 million mortgage
in September 1999 with the acquisition of Avondale Apartments.
General and administrative expenses were $6.1 million for 2001 as compared
to $7.5 million for 2000 and $6.2 million for 1999. The decrease in general and
administrative expenses in 2001 from 2000 was primarily attributable to
increased property management fees passed through to tenants in 2001 that in
turn reduced the administrative expenses of the Trust. General and
administrative expenses also declined in 2001 due to lower incentive
compensation as a result of a reduced rate of growth of the Trust. The increase
in general and administrative expenses in 2000 from 1999 was primarily
attributable to increased incentive compensation due to the high rate of growth
of the Trust.
Gain on sale of real estate was $4.3 million for the year ended December
31, 2001, resulting from the sale of 10400 Connecticut Avenue. Gain on sale of
real estate in 2000 was $3.6 million resulting from the sales of Prince William
Plaza and Clairmont Center. The $7.9 million gain on sale of real estate in 1999
resulted from the sales of Arlington Financial Center, 444 North Frederick
Avenue, Department of Commerce and V Street Distribution Center.
CAPITAL RESOURCES AND LIQUIDITY
WRIT has utilized the proceeds of share offerings, unsecured and secured debt
issuance (medium and long-term fixed interest rate debt), bank lines of credit
and cash flow from operations for its capital needs. Management believes that
external sources of capital will continue to be available to WRIT from its
existing unsecured bank line of credit commitments and from selling additional
shares and/or the sale of medium or long-term secured or unsecured notes. The
funds raised would be used for new acquisitions and capital improvements.
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.
WRIT has two line of credit commitments in place from commercial banks: a
$25.0 million line of credit and a $50.0 million line of credit. Both bear
interest at an adjustable spread over LIBOR based on the Trust's interest
coverage ratio and public debt rating. As of December 31, 2001, WRIT had $0
outstanding under the company's lines of credit. The $25.0 million line of
credit matures March 2002, and negotiations for renewal of this line of credit
are under discussion.
The lines of credit and senior and medium-term notes payable contain
certain financial and non-financial covenants, all of which WRIT has met as of
December 31, 2001. The covenants at present require insurance coverage for all
perils or special form types of insurance. The loan documents currently make no
specific reference to terrorism insurance. WRIT believes it is currently covered
against such acts under the insurance coverage in full force and effect until
renewal in September 2002. WRIT anticipates obtaining additional insurance
coverage at higher costs upon renewal; however, the Trust's financial condition
and results of operations are subject to the risks associated with acts of
terrorism and the potential for uninsured losses as the result of any such act.
WRIT acquired three properties in 2001 for total acquisition costs of $67.8
million. Acquisitions in 2000 included three improved properties and the land
under Munson Hill Towers at a cost of $26.6 million. Seven properties were
acquired in 1999 for a total acquisition cost of $61.8 million.
2001 acquisitions were funded through income from operations, line of
credit advances and proceeds from the public offering in April 2001 and a
property sale in September 2001. On April 24, 2001 WRIT completed a public
offering of 2.3 million shares. The $53.1 million net proceeds were used to
repay $43.0 million in borrowings under the Trust's line of credit. WRIT
disposed of one property in 2001 resulting in net proceeds of $ 8.1 million.
Line of credit advances and the use of proceeds from property sales
financed the 2000 acquisitions in February and August 2000. WRIT disposed of two
properties in 2000 resulting in net proceeds of $5.7 million. The proceeds from
these sales were used to partially fund 2000 acquisitions. On November 6, 2000,
WRIT sold $55.0 million of 7.78% unsecured notes due November 2004. The notes
bear an effective interest rate of 7.89%. 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.
The 1999 acquisitions were financed by line of credit advances, the use of
proceeds from property sales in February 1999 and the assumption of a
non-recourse mortgage payable of $8.7 million. WRIT disposed of six properties
in 1999 resulting in net proceeds of $22.0 million. On September 27, 1999, WRIT
closed on a $50.0 million mortgage note payable, the proceeds of which were used
to pay down WRIT's unsecured lines of credit. The mortgage is secured by WRIT's
five Virginia multifamily properties.
11
Cash flow from operating activities totaled $74.7 million, $62.0 million
and $53.2 million for the years ended December 31, 2001, 2000 and 1999,
respectively, including net income of $52.4 million (net of $4.3 million gain on
property sales), $45.1 million (net of $3.6 million gain on property sales) and
$44.3 million (net of $7.9 million gain on property sales), respectively, and
depreciation and amortization of $26.7 million, $22.7 million and $19.6 million,
respectively. The increase in cash flows from operating activities in 2001 and
2000 was primarily due to real estate acquisitions, increased operating income
from previously owned properties and the resultant increase in net income.
Cash flows used in investing activities totaled $65.7 million, $37.4
million and $49.9 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The increase in cash flows used in investing activities in 2001
from 2000 is attributable to an increase in real estate acquisitions offset by
lower capital improvements and higher net proceeds for the property sale in
2001. The decline in cash flows used in investing activities in 2000 from 1999
is attributable to a reduction in real estate acquisitions and lower net
proceeds from the sale of real estate.
Cash flows provided by financing activities were $11.0 million for the year
ended December 31, 2001 compared to cash flows used in financing activities of
$22.9 million and $3.2 million for the years ended December 31, 2000 and
December 31, 1999, respectively. Cash flows provided by financing activities in
2001 compared to 2000 increased as a result of the $53.1 million proceeds from
the 2001 public offering and an increase in share options exercised offset by
increased dividend payments in 2001. Cash flows used in financing activities in
2000 compared to 1999 increased as a result of increased dividend payments in
2000, increased line of credit repayments in excess of advances, offset by net
proceeds from the debt offering in 2000.
Rental revenue has been the principal source of funds to pay WRIT's
operating expenses, interest expense and dividends to shareholders. In 2001,
2000 and 1999, WRIT paid dividends totaling $49.7 million, $44.0 million and
$41.3 million, respectively.
CAPITAL IMPROVEMENTS
Capital improvements of $14.0 million were completed in 2001, including tenant
improvements. Capital improvements to WRIT properties in 2000 and 1999 were
approximately $16.3 million and $18.4 million, respectively.
WRIT's capital improvement costs for 1999-2001 were as follows:
Year Ended December 31,
-----------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
Accretive capital improvements:
Acquisition related $ 3,528 $ 1,640 $ 5,716
Expansions and
major renovations 794 892 5,929
Tenant improvements 4,096 6,342 2,342
- --------------------------------------------------------------------------------
Total Accretive
capital improvements 8,418 8,874 13,987
Other 5,597 7,394 4,384
- --------------------------------------------------------------------------------
Total $ 14,015 $ 16,268 $ 18,371
================================================================================
Accretive Capital Improvements
Acquisition Related--These are capital improvements to properties acquired
during the current and preceding two years which were planned during WRIT's
investment analysis. In 2001 the most significant of these improvements were
made to Wayne Plaza, One Central Plaza, Courthouse Square and Avondale
Apartments. In 2000, the most significant of these improvements were made to
Pickett Industrial Center, Northern Virginia Industrial Park, Earhart Building,
South Washington Street, Bethesda Hill Apartments and Munson Hill Towers. In
1999, the most significant of these improvements were made to 7900 Westpark
Drive, Woodburn Medical Park, Bethesda Hill Apartments, Ammendale Technology
Park II and Northern Virginia Industrial Park.
Expansions and Major Renovations--Expansions increase the rentable area of a
property. Major renovations are improvements sufficient to increase the income
otherwise achievable at a property. In February 2001, WRIT acquired an apartment
building at 1611 North Clarendon Boulevard adjacent to WRIT's 1600 Wilson
Boulevard office property with the intent of developing a high-rise apartment
building on that site utilizing the available density rights from both
properties. Expansion costs in 2001 include costs associated with this
development as well as a facade renovation of Westminster Shopping Center. 2000
expansion costs were related to the final costs associated with the expansion at
7900 Westpark Drive. During 1999, WRIT completed the 49,000 square foot
expansion at 7900 Westpark Drive. WRIT also completed the renovation of the
Bradlee Shopping Center during 1999.
Tenant Improvements--Tenant Improvements are costs associated with commercial
lease transactions such as painting, carpeting and other space build-out.
WRIT's average Tenant Improvement Costs for 1999-2001 per square foot of
space leased were as follows:
Year Ended December 31,
-----------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Office Buildings $ 4.56 $ 4.71 $ 4.59
Retail Centers $ 2.65 $ 1.81 $ 0.69
Industrial/Flex Properties $ 0.17 $ 1.47 $ 0.55
The Retail and Industrial Tenant Improvement costs are substantially lower
than Office Improvement costs due to the tenant improvements required in these
property types being substantially less extensive than in offices. WRIT believes
its office tenant improvement costs are among the lowest in the industry for a
number of reasons. Approximately 69% of our office tenants renew their leases
with WRIT. Renewing tenants generally require minimal tenant improvements. In
addition, lower tenant improvement costs are one of the many benefits of WRIT's
focus on leasing to smaller office tenants. Smaller office suites have limited
configuration alternatives. Therefore, WRIT is often able to lease an existing
suite with tenant improvements being limited to new paint and carpet.
12
Other Capital Improvements
Other Capital Improvements are those not included in the above categories. These
are also referred to as recurring capital improvements. Over time these costs
will be reincurred to maintain a property's income and value. In the Trust's
residential properties, these include new appliances, flooring, cabinets,
bathroom fixtures, and the like. These improvements are made as needed upon
vacancy of an apartment and averaged $958 for the 39% of apartments turned over
in 2001. In 2001, WRIT also expensed an average of $355 per apartment turnover
for items which do not have a long-term life and are, therefore, not
capitalized.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements which involve risks and
uncertainties. Such forward-looking statements include (a) WRIT's intention to
invest in properties that it believes will continue to increase in income and
value; (b) WRIT's belief that its real estate markets will continue to perform
well in 2002; (c) WRIT's belief that external sources of capital will continue
to be available and that additional sources of capital will be available from
the sale of shares or notes; (d) WRIT's belief that it has the liquidity and
capital resources necessary to meet its known obligations and to make additional
property acquisitions and capital improvements when appropriate to enhance
long-term growth and (e) other statements preceded by, followed by or that
include the words "believes," "expects," "intends," "anticipates," "potential"
and other similar expressions.
WRIT claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
the foregoing statements. The following important factors, in addition to those
discussed elsewhere in this Annual Report, could affect WRIT's future results
and could cause those results to differ materially from those expressed in the
forward-looking statements: (a) the economic health of WRIT's tenants; (b) the
economic health of the Greater Washington-Baltimore region, or other markets
WRIT may enter, including the effects of changes in Federal government spending;
(c) the supply of competing properties; (d) inflation; (e) consumer confidence;
(f) unemployment rates; (g) consumer tastes and preferences; (h) stock price and
interest rate fluctuations; (i) WRIT's future capital requirements; (j)
competition; (k) compliance with applicable laws, including those concerning the
environment and access by persons with disabilities; (l) weather conditions and
(m) the effects of changes in capital availability to the technology and
biotechnology sectors of the economy.
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:
Year Ended December 31,
-----------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Earnings to fixed charges 2.78x 2.63x 2.61x
Debt service coverage 3.60x 3.40x 3.42x
We computed the ratios of earnings to fixed charges 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.
We computed debt service coverage ratio by dividing earnings before
interest income and expense, depreciation, amortization and gain on sale of real
estate by interest expense and principal amortization.
QUALITATIVE AND QUANTITATIVE 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 imminent refinancing or new debt issuance.
The table below presents principal, interest and related weighted average
interest rates by year of maturity, with respect to debt outstanding on December
31, 2001.
2002 2003 2004 2005 2006 Thereafter Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
DEBT (all fixed rate except lines
of credit)
Unsecured debt
Principal $ -- $50,000 $55,000 $ -- $50,000 $110,000 $265,000 $272,689
Interest $19,230 $18,043 $15,311 $11,389 $10,180 $ 81,558 $155,711
Average interest rate 7.37% 7.36% 7.33% 7.17% 7.11% 7.33% 7.32%
Mortgages
Principal amortization
(30-year schedule) $ 1,177 $ 7,651 $ 1,113 $26,638 $ 302 $ 57,845 $ 94,726 $ 98,786
Interest $ 7,129 $ 6,456 $ 6,383 $ 5,790 $ 4,282 $ 13,505 $ 43,545
Average interest rate 7.42% 7.30% 7.30% 7.30% 7.09% 7.01% 7.17%
13
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
------------------
2001 2000
- ----------------------------------------------------------------------------
(In thousands)
ASSETS
Land $ 151,782 $ 142,811
Building 622,804 555,702
- ----------------------------------------------------------------------------
Total real estate, at cost 774,586 698,513
Accumulated depreciation (122,625) (100,906)
- ----------------------------------------------------------------------------
Total investment in real estate, net 651,961 597,607
Cash and cash equivalents 26,441 6,426
Rents and other receivables, net of
allowance for doubtful accounts
of $1,993 and $1,743, respectively 10,523 9,795
Prepaid expenses and other assets 19,010 19,587
- ----------------------------------------------------------------------------
Total assets $ 707,935 $ 633,415
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 13,239 $ 13,048
Advance rents 3,604 3,269
Tenant security deposits 6,148 5,624
Mortgage notes payable 94,726 86,260
Notes payable 265,000 265,000
- ----------------------------------------------------------------------------
Total liabilities 382,717 373,201
- ----------------------------------------------------------------------------
Minority interest 1,611 1,558
- ----------------------------------------------------------------------------
Shareholders' equity
Shares of beneficial interest, $.01
par value; 100,000 shares authorized:
38,829 and 35,740 shares issued and
outstanding, respectively 388 357
Additional paid in capital 323,257 261,004
Retained earnings (deficit) (38) (2,705)
- ----------------------------------------------------------------------------
Total shareholders' equity 323,607 258,656
- ----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 707,935 $ 633,415
============================================================================
The accompanying notes are an integral part of these statements.
14
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
--------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Real estate rental revenue $148,424 $134,732 $118,975
Real estate expenses
Utilities 8,351 7,682 7,298
Real estate taxes 10,307 9,347 8,496
Repairs and maintenance 6,148 5,580 4,765
Administrative 3,068 2,753 2,520
Management fees 4,669 4,195 3,693
Operating services and supplies 5,864 5,459 4,856
Common area maintenance 2,074 1,961 1,850
Other expenses 1,666 1,339 1,803
- --------------------------------------------------------------------------------
Total real estate expenses 42,147 38,316 35,281
- --------------------------------------------------------------------------------
Operating income 106,277 96,416 83,694
Depreciation and amortization 26,735 22,723 19,590
- --------------------------------------------------------------------------------
Income from real estate 79,542 73,693 64,104
Other income 1,686 943 732
Interest expense (27,071) (25,531) (22,271)
General and administrative expenses (6,100) (7,533) (6,173)
- --------------------------------------------------------------------------------
Income before gain on sale of real estate 48,057 41,572 36,392
Gain on sale of real estate 4,296 3,567 7,909
- --------------------------------------------------------------------------------
Net income $ 52,353 $ 45,139 $ 44,301
================================================================================
Basic earnings per share $ 1.39 $ 1.26 $ 1.24
================================================================================
Diluted earnings per share $ 1.38 $ 1.26 $ 1.24
================================================================================
Weighted Average Shares Outstanding--Basic 37,674 35,735 35,714
================================================================================
Weighted Average Shares Outstanding--Diluted 37,951 35,872 35,723
================================================================================
The accompanying notes are an integral part of these statements.
15
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
-------------------------------------------------------------
Shares of
Beneficial Additional Retained
Interest at Paid in Earnings Shareholders'
Shares Par Value Capital (Deficit) Equity
- ---------------------------------------------------------------------------------------------
(In thousands)
Balance, December 31, 1998 35,692 $357 $260,225 $ (6,849) $253,733
Net income -- -- -- 44,301 44,301
Dividends -- -- -- (41,341) (41,341)
Share options exercised 20 -- 286 -- 286
Share grants 9 -- 210 -- 210
- ---------------------------------------------------------------------------------------------
Balance, December 31, 1999 35,721 357 260,721 (3,889) 257,189
Net income -- -- -- 45,139 45,139
Dividends -- -- -- (43,955) (43,955)
Share options exercised 7 -- 100 -- 100
Share grants 12 -- 183 -- 183
- ---------------------------------------------------------------------------------------------
Balance, December 31, 2000 35,740 357 261,004 (2,705) 258,656
Net income -- -- -- 52,353 52,353
Dividends -- -- -- (49,686) (49,686)
Share options exercised 518 5 8,464 -- 8,469
Share offering 2,535 25 53,083 -- 53,108
Share grants 36 1 706 -- 707
- ---------------------------------------------------------------------------------------------
Balance, December 31, 2001 38,829 $388 $323,257 $ (38) $323,607
- ------------=================================================================================
The accompanying notes are an integral part of these statements.
16
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
---------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 52,353 $ 45,139 $ 44,301
Adjustments to reconcile net
income to cash provided by
operating activities:
Gain on sale of real estate (4,296) (3,567) (7,909)
Depreciation and amortization 26,735 22,723 19,590
Increases in other assets (1,949) (3,382) (1,954)
Increases (decreases) in
other liabilities 1,610 834 (985)
Share grants 219 227 177
- --------------------------------------------------------------------------------
Cash provided by operating activities 74,672 61,974 53,220
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real estate acquisitions, net* (59,250) (26,581) (53,197)
Improvements to real estate (14,015) (16,268) (18,371)
Non-real estate capital improvements (538) (267) (350)
Net proceeds from sale of real estate 8,115 5,732 22,033
- --------------------------------------------------------------------------------
Cash used in investing activities (65,688) (37,384) (49,885)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from share offering 53,083 -- --
Dividends paid (49,686) (43,955) (41,341)
Line of credit advances 43,000 21,000 33,000
Repayments of lines of credit (43,000) (54,000) (44,000)
Proceeds from mortgage note payable -- -- 49,225
Mortgage principal payments (843) (778) (594)
Net proceeds from debt offering -- 54,753 --
Net proceeds from the exercise
of share options 8,477 100 496
- --------------------------------------------------------------------------------
Cash provided by (used in)
financing activitie 11,031 (22,880) (3,214)
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 20,015 1,710 121
Cash and cash equivalents, beginning of year 6,426 4,716 4,595
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 26,441 $ 6,426 $ 4,716
- --------------------------------------------------------------------------------
Supplemental disclosure of cash
flow information:
Cash paid for interest $ 25,866 $ 24,001 $ 18,968
================================================================================
*SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On November 1, 2001, WRIT purchased Sullyfield Center for an acquisition cost of
$21.7 million. WRIT assumed a mortgage in the amount of $8.5 million and paid
the balance in cash. The $8.5 million of assumed mortgage is not included in the
$59.3 million amount shown as 2001 real estate acquisitions.
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 $53.2 million amount shown as 1999 real estate acquisitions.
The accompanying notes are an integral part of these statements.
17
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001, 2000 and 1999
1. NATURE OF BUSINESS
Washington Real Estate Investment Trust, a Maryland real estate investment trust
("WRIT," the "company" or the "Trust"), is a self-administered, self-managed,
equity real estate investment trust, successor to a trust organized in 1960. The
Trust's business consists of the ownership and operation of income-producing
real estate properties in the greater Washington-Baltimore region. WRIT owns a
diversified portfolio of office buildings, industrial/flex properties,
multifamily buildings and retail centers.
Federal Income Taxes
WRIT operates in a manner intended to enable it to qualify as a real estate
investment trust (REIT) under the Internal Revenue Code (the "Code"). In
accordance with the Code, a trust which distributes its capital gains and at
least 90 percent 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. WRIT believes it qualifies as a REIT and has distributed all of
its taxable income for the fiscal years through 2001 in accordance with the
provisions of the Code. Accordingly, no provision for federal income taxes is
required.
2. ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Trust and its majority owned subsidiaries, after eliminating all intercompany
transactions.
New Accounting Pronouncements
Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 144 is effective for all quarters of fiscal years beginning after
December 15, 2001. At December 31, 2001, WRIT held one property under contract
for sale which sold subsequent to this date (see Note 15). WRIT recognized no
impairment on this property prior to or upon sale.
Derivative Instruments and Hedging Activities
In June 1998, 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 SFAS 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. 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 the reporting of derivative instruments
acquired by WRIT in future periods. WRIT has entered into interest rate
protection agreements in the past to reduce its exposure to interest rate risk
on anticipated borrowings. The costs (if any) of such agreements which qualify
for hedge accounting are included in other assets and are amortized over the
interest rate protection agreement term. In the event that interest rate
protection agreements that qualify for hedge accounting are terminated or are
closed out, the associated gain or loss is deferred and amortized over the term
of the underlying hedged asset or liability. Amounts to be paid or received
under interest rate protection agreements are accrued currently and are netted
with interest expense for financial statement presentation purposes.
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 the company's 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 the company's
receivables. Contingent rents are recorded when cumulative sales exceed the
amount necessary for the contingent rents to equal minimum annual rent, and WRIT
has been informed of cumulative sales data; thereafter, percentage rent is
accrued based on subsequent sales.
WRIT recognizes cost reimbursement income from pass-through expenses on an
accrual basis over the periods in which the expenses were incurred. Pass-through
expenses are comprised of real estate taxes, operating expenses and common area
maintenance costs which are reimbursed by tenants in accordance with specific
allowable costs per tenant lease agreements.
Minority Interest
WRIT entered into an operating agreement with a member of the previous ownership
entity of Northern Virginia Industrial Park in conjunction with the acquisition
of this property in May 1998. This resulted in a minority ownership interest in
this property based upon defined company ownership units at the date of
purchase. WRIT accounts for this activity by allocating the percentage ownership
interest of the net operating income of the property to minority interest.
Quarterly distributions are made to the minority owner equal to the quarterly
dividend per share for each ownership unit.
Deferred Financing Costs
Costs associated with the issuance of mortgage and other notes and draws on
lines of credit are capitalized and amortized using the effective interest rate
method over the term of the related notes and are included in interest expense
on the accompanying statements of income.
The amortized debt costs included in interest expense totaled $1.1 million,
$1.0 million and $1.0 million for the years ended December 31, 2001, 2000 and
1999, respectively.
18
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 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. If such carrying amount is in excess of the estimated projected
operating cash flows of the property, WRIT would recognize an impairment loss
equivalent to an amount required to adjust the carrying amount to the estimated
fair market value. There were no property impairments recognized during the
three-year period ending December 31, 2001. In accordance with SFAS No. 66,
"Accounting for Sales of Real Estate," sales are recognized at closing only when
sufficient down payments have been obtained, possession and other attributes of
ownership have been transferred to the buyer and the Trust has no significant
continuing involvement. The gain or loss resulting from the sale of properties
is included in net income at the time of sale.
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.
Stock Based Compensation
WRIT maintains Incentive Stock Option Plans as described in Note 8 which include
qualified and non-qualified options for eligible employees. Stock options are
accounted for in accordance with APB 25, whereby if options are priced at fair
market value or above at the date of grant, no compensation expense is
recognized.
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
The Trust calculates basic and diluted earnings per share in accordance with
SFAS No. 128, "Earnings Per 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
the Trust's share based compensation plans (see Note 8) that could potentially
reduce or "dilute" earnings per share, based on the treasury stock method.
The weighted-average number of shares outstanding for the years ended
December 31, 2001, 2000 and 1999 were 37.7 million, 35.7 million and 35.7
million, respectively, and 38.0 million, 35.9 million and 35.7 million on a
diluted basis for the years ended December 31, 2001, 2000 and 1999,
respectively.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
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:
December 31,
----------------------
2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Office Buildings $431,213 $383,530
Retail Centers 95,626 94,900
Multifamily 106,381 102,142
Industrial/Flex Properties 141,366 117,941
- --------------------------------------------------------------------------------
$774,586 $698,513
================================================================================
WRIT's results of operations are dependent on the overall economic health
of its tenants and the specific segments in which WRIT holds properties, as well
as the overall economic health of the markets in which it owns property. These
segments include commercial office, multifamily, retail and industrial. Although
all sectors are affected by external factors, such as inflation, consumer
confidence, unemployment rates and consumer tastes and preferences, the retail
segment is particularly sensitive to such factors. A decline in the retail
sector of the economy could reduce merchant sales, which could adversely affect
the operating results of WRIT. WRIT's retail properties provided 13% of total
revenue and 23% of net income for the year ended December 31, 2001, 14% and 33%
of total revenue and net income, respectively, for the year ended December 31,
2000 and 15% of total revenue and 25% of net income for the year ended December
31, 1999.
As of December 31, 2001, 7900 Westpark office building accounted for 11
percent of total real estate assets and 9 percent of total revenues. No other
single property or tenant accounted for more than 10 percent of total assets or
total revenues.
19
Properties acquired by WRIT during the years ending December 31, 2001, 2000 and
1999 are as follows:
Acquisition
Rentable Cost (In
Acquisition Date Property Type Square Feet thousands)
- ---------------------------------------------------------------------------------------------
February 15, 2001 1611 North Clarendon Multifamily 11,000 $ 1,521
April 19, 2001 One Central Plaza Office 274,000 44,549
November 1, 2001 Sullyfield Commerce
Center Industrial 248,000 21,742
- ---------------------------------------------------------------------------------------------
Total 2001 533,000 $67,812
=============================================================================================
February 29, 2000 833 S. Washington
Street Retail 6,000 $ 1,400
May 5, 2000 962 Wayne Plaza Office 91,000 7,800
August 9, 2000 Munson Hill Towers
Land Lease Multifamily N/A 300
October 10, 2000 Courthouse Square Office 113,000 17,100
- ---------------------------------------------------------------------------------------------
Total 2000 210,000 $26,600
=============================================================================================
January 27, 1999 Dulles South IV Industrial 83,000 $ 6,909
April 16, 1999 Sully Square Industrial 95,000 7,557
May 21, 1999 600 Jefferson Plaza Office 115,000 14,472
May 21, 1999 1700 Research Office 103,000 12,941
Boulevard
September 10, 1999 Amvax Industrial 32,000 2,231
September 20, 1999 Avondale (236 units) Multifamily 162,000 12,908
November 30, 1999 Parklawn Plaza Office 40,000 4,764
- ---------------------------------------------------------------------------------------------
Total 1999 630,000 $61,782
=============================================================================================
WRIT accounted for each acquisition using the purchase method of accounting.
Properties sold by WRIT during the years ending December 31, 2001, 2000 and 1999
are as follows:
Rentable Sales Price
Disposition Date Property Type Square Feet (In thousands)
- ---------------------------------------------------------------------------------------------
September 28, 2001 10400 Connecticut Avenue Office 65,000 $ 8,400
=============================================================================================
February 29, 2000 Prince William Plaza Retail 55,000 $ 2,800
July 7, 2000 Westminster parcel Retail parcel 10,000 425
August 22, 2000 Clairmont Center Retail 40,000 3,000
- ---------------------------------------------------------------------------------------------
Total 2000 105,000 $ 6,225
=============================================================================================
February 5, 1999 444 North Frederick Avenue Office 66,000 $ 5,671
February 5, 1999 Arlington Financial Center Office 51,000 9,798
February 5, 1999 Department of Commerce Industrial 105,000 7,031
February 26, 1999 V Street Distribution Center Industrial 31,000 600
- ---------------------------------------------------------------------------------------------
Total 1999 253,000 $23,100
=============================================================================================
The total revenues and net income for 10400 Connecticut Avenue in 2001 were
$1.0 million and $0.4 million, respectively. The retail properties disposed in
the year ended December 31, 2000 resulted in total revenues and net income of
$0.4 million and $0.2 million, respectively. The office and industrial
properties disposed in the year ended December 31, 1999 resulted in total
revenues and net income of $0.4 million and $0.3 million, respectively.
4. MORTGAGE NOTES PAYABLE
On August 22, 1995, WRIT assumed a $7.8 million mortgage note payable as partial
consideration for WRIT's acquisition of Frederick County Square retail center.
The mortgage bears interest at 9.00 percent per annum. 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 WRIT's
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 WRIT's acquisition of the Avondale Apartments. The
mortgage bears interest at 7.88 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 Munson Hill Towers, Country Club Towers, Roosevelt Towers, Park Adams
Apartments, and the Ashby Apartments. The mortgage bears interest at 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. These funds were used to
repay advances on WRIT's lines of credit.
20
On November 1, 2001, WRIT assumed an $8.5 million mortgage note payable,
fair valued at $9.3 million, as partial consideration for WRIT's acquisition of
Sullyfield Commerce Center. The mortgage bears interest at 9.00 percent per
annum. Principal and interest are payable monthly until February 1, 2007, at
which time all unpaid principal and interest are payable in full. In accordance
with the purchase method of accounting, the mortgage was fair valued at $9.3
million resulting in an adjustment to the basis of this property.
Scheduled principal payments during the five years subsequent to December
31, 2001 and thereafter are as follows:
(In thousands)
- --------------------------------------------------------------------------------
2002 $ 1,177
2003 7,651
2004 1,113
2005 26,638
2006 302
Thereafter 57,845
- --------------------------------------------------------------------------------
$94,726
================================================================================
5. UNSECURED LINES OF CREDIT PAYABLE
During 2001, WRIT maintained two unsecured lines of credit: a $25.0 million line
of credit ("Credit Facility No. 1") and a $50.0 million line of credit ("Credit
Facility No. 2").
Credit Facility No. 1
WRIT had $0 outstanding as of December 31, 2001 and 2000 related to Credit
Facility No. 1.
The following advances have been made under this commitment:
Advance Date Paid Amount 2001 2000 1999
Date in Full (In thousands) Rate Rate Rate
- --------------------------------------------------------------------------------
May 1999 July 1999 $12,000 -- -- 5.67%
Mar.-Sept. 1999 Jan.-March 2000 22,000 -- 6.33% 6.33%
Jan.-March 2000 November 2000 $22,000 -- 7.33% --
Prior to March 17, 1999, all new advances and interest rate adjustments,
upon the expiration of WRIT's interest lock-in dates, bore interest at LIBOR
plus a spread based on WRIT's public debt rating. All unpaid interest and
principal could be prepaid prior to the expiration of WRIT's interest rate
lock-in periods subject to a yield maintenance obligation.
On March 17, 1999, WRIT executed an amended and restated agreement
extending the maturity date to March 17, 2002. Under the amended agreement, WRIT
may choose either a Corporate Base Rate ("CBR") or a LIBOR advance. Both
advances have interest rates based on the applicable rate plus a spread based on
the most recent ratings from Moody's and/or S&P for WRIT's long-term unsecured
debt. Negotiations for renewal of this line of credit are under discussion.
This $25.0 million credit commitment requires WRIT to pay quarterly to the
lender an unused commitment fee at the rate of 0.375 percent per annum on the
amount by which the $25.0 million commitment exceeds the balance of outstanding
advances and term loans. At both December 31, 2001 and 2000, $25.0 million of
this commitment was unused and available for subsequent acquisitions or capital
improvements. This commitment also contains certain financial and non-financial
covenants including debt service coverage, net worth, and permitted indebtedness
ratios, which WRIT has met as of December 31, 2001. In addition, this commitment
requires approval to be obtained from the lender for purchases by the Trust over
an agreed upon amount.
Credit Facility No. 2
WRIT had $0 outstanding as of December 31, 2001 and 2000 related to Credit
Facility No. 2. The following advances have been made under this commitment:
Advance Date Paid Amount 2001 2000 1999 1998
Date in Full (In thousands) Rate Rate Rate Rate
- -----------------------------------------------------------------------------------------
May 1998 July 1999 $13,000 -- -- 5.54% 5.54%-6.39%
June 1998 June 1999 4,000 -- -- 6.02% 6.02%-6.39%
Sept.-Nov. 1998 March-May 1999 27,000 -- -- 5.85% 5.85%
Jan.-Sept. 1999 July-Sept. 1999 51,000 -- -- 5.90% --
Sept.-Nov. 1999 June-Aug. 2000 11,000 -- -- 6.72% --
March 2000 November 2000 2,000 -- 7.45%-7.81% -- --
May 2000 November 2000 5,000 -- 7.80%-7.81% -- --
June 2000 November 2000 7,000 -- 6.64%-7.81% -- --
August 2000 November 2000 4,000 -- 6.86%-7.51% -- --
October 2000 November 2000 14,000 -- 7.46% -- --
April 19, 2001 April 27, 2001 $43,000 5.38% -- -- --
21
On July 25, 1999, WRIT executed an agreement to amend and restate the
original Credit Facility No. 2 agreement. All unpaid interest and principal are
due July 2002 and can be prepaid prior to this date without any prepayment fee
or yield maintenance obligation. Any new advances shall bear interest at LIBOR
plus a spread based on WRIT's public debt rating. Negotiations for renewal of
this line of credit are under discussion.
Credit Facility No. 2 provides WRIT the option to convert any advances or
portions thereof into a term loan at any time through July 2002. The principal
amount of each term loan, if any, shall be repaid in July 2002.
This $50.0 million credit commitment requires WRIT to pay the lender an
unused commitment fee ranging from 0.15 to 0.25 percent per annum based on
WRIT's public debt rating. The fee is paid on the amount by which the $50.0
million commitment exceeds the balance of outstanding advances and term loans.
At December 31, 2001 and 2000, $50.0 million and $50.0 million, respectively, of
this commitment was unused. This fee is paid quarterly in arrears. This
commitment also contains certain financial covenants including cash flow to debt
service, net worth, capitalization and permitted indebtedness ratios, which WRIT
has met as of December 31, 2001.
Credit Facility No. 1 and No. 2 contain certain financial and non-financial
covenants, all of which WRIT has met as of December 31, 2001. The covenants at
present require insurance coverage for all perils or special form types of
insurance. The loan documents currently make no specific reference to terrorism
insurance. WRIT believes it is currently covered against such acts under the
insurance coverage in full force and effect until renewal in September 2002.
WRIT anticipates obtaining additional insurance coverage at higher costs upon
renewal; however, the Trust's financial condition and results of operations are
subject to the risks associated with acts of terrorism and the potential for
uninsured losses as the result of any such act.
Information related to short-term borrowings are as follows:
2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Maximum Amount Outstanding $43,000 $54,000
Average Amount Outstanding $43,000 $33,734
Weighted Average Interest Rate 5.38% 7.22%
The 2001 average balance was based on the individual borrowing outstanding
for eight days during this period, and the 2000 average balance represented
multiple borrowings outstanding from January through November 2000.
6. SENIOR AND MEDIUM-TERM NOTES PAYABLE
Senior Notes
On August 13, 1996 WRIT sold $50.0 million of 7.125 percent 7-year unsecured
notes due August 13, 2003, and $50.0 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. These
notes do not require any principal payment and are due in full at maturity.
Medium-Term Notes
On February 20, 1998, WRIT sold $50.0 million of 7.25 percent unsecured notes
due February 25, 2028 at 98.653 percent to yield approximately 7.36 percent.
WRIT also sold $60.0 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 $102.8 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 related
closed hedge settlements of approximately $7.2 million are amortized over the
lives of the notes using the effective interest method. These notes do not
require any principal payment and are due in full at maturity.
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 WRIT's lines
of credit.
These notes contain certain financial and non-financial covenants, all of
which WRIT has met as of December 31, 2001. The covenants at present require
insurance coverage for all perils or special form types of insurance. The loan
documents currently make no specific reference to terrorism insurance. WRIT
believes it is currently covered against such acts under the insurance coverage
is in full force and effect until renewal in September 2002. WRIT anticipates
obtaining additional insurance coverage at higher costs upon renewal; however,
the Trust's financial condition and results of operations are subject to the
risks associated with acts of terrorism and the potential for uninsured losses
as the result of any such act.
7. DIVIDENDS
The following is a breakdown of the taxable percentage of WRIT's dividends for
2001, 2000 and 1999, respectively:
Ordinary Income Return of Capital
- --------------------------------------------------------------------------------
2001 100% 0%
2000 100% 0%
1999 100% 0%
8. SHARE OPTIONS AND GRANTS
WRIT maintains Incentive Stock Option Plans (the "Plans"), which include
qualified and non-qualified options. As of December 31, 2001, 1.8 million shares
may be awarded to eligible employees. Under the Plans, options, which are issued
at market price on the date of grant, vest after not more than two years and
expire ten years
22
following the date of grant. WRIT adopted the Washington Real Estate Investment
Trust 2001 Stock Option Plan ("New Stock Option Plan") to replace the 1991 Stock
Option Plan ("Stock Option Plan") that expired on June 25, 2001. The New Stock
Option Plan provides for the grant of incentive and non-qualified stock options
to the company's employees. WRIT's Board of Trustees approved the New Stock
Option Plan at a meeting held on May 22, 2001 by a unanimous consent, and WRIT's
shareholders approved the New Stock Option Plan at WRIT's annual meeting of
shareholders, held May 22, 2001. Activity under the Plans is summarized below:
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
- -----------------------------------------------------------------------------------------------
Outstanding at January 1 1,621,000 $17.16 1,273,000 $15.87 806,000 $16.83
Granted 238,000 24.85 376,000 21.34 513,000 14.47
Exercised (517,000) 16.39 (6,000) 15.21 (12,000) 15.89
Expired (106,000) 18.11 (22,000) 14.74 (34,000) 17.28
Outstanding at December 31 1,236,000 18.88 1,621,000 17.16 1,273,000 15.87
Exercisable at December 31 856,000 16.87 1,008,000 16.31 560,000 16.54
The 856,000 exercisable options outstanding at December 31, 2001 have
exercise prices between $14.47 and $24.85, with a weighted-average exercise
price of $16.87 and a weighted average remaining contractual life of 7.4 years.
The remaining 380,000 options have exercise prices between $21.34 and $24.85,
with a weighted average exercise price of $23.28 and a weighted average
remaining contractual life of 9.6 years.
WRIT accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the Plan been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," WRIT's net income and earnings per share would have been reduced
to the following pro-forma amounts:
2001 2000 1999
- --------------------------------------------------------------------------------
Net Income:
As Reported $52,353 $45,139 $44,301
Pro-Forma 51,523 44,214 43,419
Basic Earnings Per Share:
As Reported 1.39 1.26 1.24
Pro-Forma 1.37 1.24 1.22
Weighted-average fair value
of options granted 3.49 2.46 1.76
Weighted-average assumptions:
Expected lives (years) 7 7 7
Risk free interest rate 5.08% 5.49% 6.42%
Expected volatility 19.81% 17.57% 21.05%
Expected dividend yield 5.29% 5.85% 7.12%
The assumptions used in the calculations of weighted average fair value of
options granted are as prescribed under accounting principles generally accepted
in the United States. Such assumptions may not be the same as those used by the
financial community and others in determining the fair value of such options.
WRIT has computed basic earnings per share and fully diluted earnings per
share. The dilutive impact on basic weighted-average shares outstanding for the
year ended December 31, 2001 resulted in a $0.01 reduction in net income per
share. There was no impact of dilution of common equivalent shares on the basic
weighted-average shares outstanding for the years ended December 31, 2001, 2000
and 1999.
During 2001 and 2000, WRIT issued 7,209 and 36,417 share grants,
respectively, to executives and trustees of the Trust. The respective
compensation expense was recorded based upon the share price at the grant date.
The Board of Trustees awards share grants subject to Compensation Committee
recommendations. The total share grants vested were 41,020 at December 31, 2001
and 15,430 at December 31, 2000.
9. BENEFIT PLANS
During 1996, management adopted an Incentive Compensation Plan ("the
Compensation Plan") for its senior personnel which is intended to align their
compensation growth with shareholders' interests. Essentially, the Compensation
Plan limits future salary increases and provides cash bonus incentives, share
options under the Incentive Stock Option Plan and share grants under the Share
Grant Plan based on financial performance of the Trust. The financial incentives
to management are earned after WRIT has achieved a prescribed level of growth.
The Stock Option Plan was adopted in 1991 and expired in June 2001. The New
Stock Option Plan was approved and adopted effective June 2001. The Share Grant
Plan is effective from 1996 forward and is reviewed by the Board of Trustees'
Compensation Committee each year. The amounts charged to expense for the share
grants were $0.2 million, $0.6 million and $0.2 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
23
In 1997, WRIT implemented a Retirement Savings Plan (the "Savings Plan").
It was established so that participants in the Savings Plan may elect to
contribute a portion of their earnings to the Savings Plan, and WRIT may, at its
discretion, make a voluntary contribution to the Savings Plan.
WRIT maintained a noncontributory defined benefit pension plan for all
eligible employees through December 31, 1995. At December 31, 1995, all benefit
accruals under the plan were frozen and thus the projected benefit obligation
("PBO") and the accumulated benefit obligation ("ABO") became equal. WRIT
terminated the plan as of December 31, 1999, and final participant distributions
were made in July 2000.
The Trust adopted a split dollar life insurance plan for senior officers,
excluding the Chief Executive Officer, in 2000. It is intended that the Trust
will recover its costs from the life insurance policies at death prior to
retirement, termination prior to retirement or at retirement age 65. It is
intended that the cash values of the policy in excess of the Trust's interest
can be used by the executive. The Trust has a security interest in the cash
value and death benefit of each policy to the extent of the sum of premium
payments made by the Trust.
The Trust has adopted a non-qualified deferred compensation plan for the
Chief Executive Officer and members of the Board of Trustees. The plan allows
for a deferral of a percentage of annual cash compensation and trustee fees.
Compensation deferred will be credited with interest equal to the Trust's
current cost of borrowings. As an incentive, if the Chief Executive Officer
should remain employed by WRIT until age 70, the compensation deferred will be
credited with an additional 2.5 percent per annum. In the event of death or
retirement prior to age 70, the compensation plus interest can be paid in either
a lump sum or in equal installments plus interest at the discretion of the plan
participant. The plan is unfunded and payments are to be made from general
assets of the Trust.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the fair value of financial instruments.
Whenever possible, the estimated fair value has been determined using quoted
market information as of December 31, 2001. The estimated fair value information
presented is not necessarily indicative of amounts the Trust could realize
currently in a market sale since the Trust may be unable to sell such
instruments due to contractual restrictions or the lack of an established
market. The estimated market values have not been updated since December 31,
2001; therefore, current estimates of fair value may differ significantly from
the amounts presented.
Below is a summary of significant methodologies used in estimating fair
values and a schedule of fair values at December 31, 2001.
Cash and Cash Equivalents
Includes cash and commercial paper with remaining maturities of less than 90
days, which are valued at the carrying value.
Mortgage Notes Payable
Mortgage notes payable consist of instruments in which certain of the Trust's
real estate assets are used for collateral. The fair value of the mortgage notes
payable is estimated based upon dealer quotes for instruments with similar terms
and maturities.
Lines of Credit Payable
Lines of credit payable consist of bank facilities which the Trust uses for
various purposes including working capital, acquisition funding or capital
improvements. The lines of credit advances are priced at a specified rate plus a
spread. The carrying value of the lines of credit payable is estimated to be
market value since the interest rate adjusts with the market. There were no
outstanding balances due on the lines of credit at December 31, 2001.
Notes Payable
Notes payable consists of $50 million, 7.125%, 7-year unsecured notes due August
13, 2003, $50 million, 7.25%, 10-year unsecured notes due August 13, 2006, $50
million, 7.25%, 20-year unsecured notes due February 25, 2028, $60 million
unsecured Mandatory Par Put Remarketed Securities with an effective yield of
6.74% through the remarketing date of February 2008 and $55 million, 7.78%,
4-year unsecured notes due November 15, 2004. The fair value of these securities
is estimated based on dealer quotes for securities with similar terms and
characteristics.
2001 2000 1999
- ----------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
- ----------------------------------------------------------------------------------------
(In thousands)
Cash and cash equivalents $ 26,441 $ 26,441 $ 6,426 $ 6,426 $ 4,716 $ 4,716
Mortgage notes payable $ 94,726 $ 98,786 $ 86,260 $ 87,493 $ 87,037 $ 84,520
Lines of credit payable -- -- -- -- $ 33,000 $ 33,000
Notes payable $265,000 $272,689 $265,000 $258,513 $210,000 $192,420
24
11. RENTALS UNDER OPERATING LEASES
Noncancellable commercial operating leases provide for minimum rental income
before any reserve for uncollectible amounts during each of the next five years
of approximately $94.2 million, $76.5 million, $59.6 million, $41.7 million,
$28.8 million and $66.9 million thereafter. Apartment leases are not included as
they are generally for one year. Most of these commercial leases increase in
future years based on changes in the Consumer Price Index or agreed-upon
percentages. Contingent rentals from the shopping centers, based on a percentage
of tenants' gross sales, were $412,000, $217,000 and $425,000 in 2001, 2000 and
1999, respectively. Real estate tax, operating expense and common area
maintenance reimbursement income was $8.4 million, $7.9 million and $6.4 million
for the years ended December 31, 2001, 2000 and 1999, respectively.
12. CONTINGENCIES
In the normal course of business, the Trust is involved in various other
lawsuits and environmental matters arising in the normal course of business.
Management believes that such matters will not have a material effect on the
financial condition or results of operations of the Trust.
13. SEGMENT INFORMATION
WRIT has four reportable segments: Office Buildings, Industrial/Flex Properties,
Multifamily and Retail Centers. Office Buildings, including medical office
buildings, represent 55 percent of 2001 real estate rental revenue and provide
office space for various types of businesses. Industrial represents 14 percent
of 2001 real estate rental revenue and are used for flex-office, warehousing and
distribution type facilities. Multifamily properties represent 18 percent of
2001 real estate rental revenue. These properties provide housing for families
throughout the Washington Metropolitan area. Retail Centers represent the
remaining 13 percent of 2001 real estate rental revenue and are typically
neighborhood grocery store or drug store anchored retail centers.
The accounting policies 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.
2001
Office Industrial/Flex Retail Corporate
Buildings Properties Multifamily Centers and Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(In thousands)
Real estate rental revenue $ 81,023 $ 20,702 $27,455 $19,244 $ -- $148,424
Real estate expenses 23,851 4,546 9,754 3,996 -- 42,147
- ----------------------------------------------------------------------------------------------------------------------
Operating income 57,172 16,156 17,701 15,248 -- 106,277
Depreciation and amortization 15,195 4,173 3,836 2,339 1,192 26,735
- ----------------------------------------------------------------------------------------------------------------------
Income from real estate 41,977 11,983 13,865 12,909 (1,192) 79,542
Other income 499 6 22 10 1,149 1,686
Interest expense (1,595) (104) (4,315) (635) (20,422) (27,071)
General and administrative -- -- -- -- (6,100) (6,100)
- ----------------------------------------------------------------------------------------------------------------------
Income before gain on sale of real estate 40,881 11,885 9,572 12,284 (26,565) 48,057
======================================================================================================================
Gain on sale of real estate 4,296 -- -- -- -- 4,296
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 45,177 $ 11,885 $ 9,572 $12,284 $(26,565) $ 52,353
======================================================================================================================
Capital investments $ 53,449 $ 14,941 $ 3,981 $ 895 $ 538 $ 73,803
======================================================================================================================
Total assets $380,990 $126,842 $80,033 $81,090 $ 38,980 $707,935
======================================================================================================================
2000
Office Industrial/Flex Retail Corporate
Buildings Properties Multifamily Centers and Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(In thousands)
Real estate rental revenue $ 70,885 $ 19,249 $26,234 $18,364 $ -- $134,732
Real estate expenses 21,118 3,997 9,258 3,943 -- 38,316
- ----------------------------------------------------------------------------------------------------------------------
Operating income 49,767 15,252 16,976 14,421 -- 96,416
Depreciation and amortization 13,050 3,765 3,486 2,422 -- 22,723
- ----------------------------------------------------------------------------------------------------------------------
Income from real estate 36,717 11,487 13,490 11,999 -- 73,693
Other income -- -- -- -- 943 943
Interest expense (1,630) -- (4,329) (637) (18,935) (25,531)
General and administrative -- -- -- -- (7,533) (7,533)
- ----------------------------------------------------------------------------------------------------------------------
Income before gain on sale of real estate 35,087 11,487 9,161 11,362 (25,525) 41,572
======================================================================================================================
Gain on sale of real estate -- -- -- 3,567 -- 3,567
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 35,087 $ 11,487 $ 9,161 $14,929 $(25,525) $ 45,139
======================================================================================================================
Capital investments $ 31,925 $ 4,525 $ 3,613 $ 2,787 $ 814 $ 43,664
======================================================================================================================
Total assets $343,806 $107,916 $79,767 $82,492 $ 19,434 $633,415
======================================================================================================================
25
1999
Office Industrial/ Retail Corporate
Buildings Flex Properties Multifamily Centers and Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Real estate rental revenue $ 61,657 $ 16,196 $ 22,926 $ 18,196 $ -- $ 118,975
Real estate expenses 18,950 3,568 8,714 4,049 -- 35,281
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 42,707 12,628 14,212 14,147 -- 83,694
Depreciation and amortization 10,979 3,301 2,915 2,395 -- 19,590
- ----------------------------------------------------------------------------------------------------------------------------
Income from real estate 31,728 9,327 11,297 11,752 -- 64,104
Other income -- -- -- -- 732 732
Interest expense (1,731) -- (1,145) (653) (18,742) (22,271)
General and administrative -- -- -- -- (6,173) (6,173)
- ----------------------------------------------------------------------------------------------------------------------------
Income before gain on sale of real estate 29,997 9,327 10,152 11,099 (24,183) 36,392
============================================================================================================================
Gain on sale of real estate 2,044 5,865 -- -- -- 7,909
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 32,041 $ 15,192 $ 10,152 $ 11,099 $(24,183) $ 44,301
============================================================================================================================
Capital investments $ 37,691 $ 19,591 $ 20,324 $ 2,049 $ 1,216 $ 80,871
============================================================================================================================
Total assets $321,741 $105,177 $ 79,548 $ 84,041 $ 17,973 $ 608,480
============================================================================================================================
14. SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS, UNAUDITED)
The following table summarizes financial data by quarter for WRIT for 2001, 2000
and 1999.
Quarter
- --------------------------------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------
2001
Real estate rental revenue $ 35,324 $ 37,418 $ 37,873 $ 37,809
Net income 10,728 12,394 16,824 12,407
Net income per share* $ 0.30 $ 0.33 $ 0.43 $ 0.32
2000
Real estate rental revenue $ 31,935 $ 33,350 $ 34,230 $ 35,217
Net income 10,910 9,963 12,793 11,473
Net income per share* $ 0.31 $ 0.28 $ 0.36 $ 0.32
1999
Real estate rental revenue $ 27,654 $ 28,864 $ 29,566 $ 32,891
Net income 16,358 8,765 8,826 10,352
Net income per share* $ 0.46 $ 0.25 $ 0.25 $ 0.29
*Includes gain on the sale of real estate of $0.11 per share in the third
quarter of 2001, $0.04 and $0.06 per share in the first and third quarters of
2000 and $0.22 per share in the first quarter of 1999, respectively.
15. SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 2001, WRIT closed on the sale of 1501 South Capitol
Street. On February 28, 2002, WRIT sold this industrial property for $6.2
million, resulting in a gain of approximately $3.8 million.
26
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF WASHINGTON REAL ESTATE INVESTMENT TRUST
We have audited the accompanying consolidated balance sheets of Washington Real
Estate Investment Trust (the "Trust," a Maryland real estate investment trust)
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Trust and subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 20, 2002
27
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Washington Real Estate Investment Trust
6110 Executive Boulevard
Rockville, MD 20852-3927
301.984.9400
800.565.9748
fax 301.984.9610
www.writ.com
COUNSEL
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, N.W.
Washington, DC 20036-5339
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
8000 Towers Crescent Drive
Vienna, VA 22182-2725
TRANSFER AGENT
EquiServe Trust Company, N.A.
P.O. Box 2598
Jersey City, NJ 07303-2598
ANNUAL MEETING
WRIT will hold its annual meeting of stockholders on May 21, 2002, at 11:00 AM
at the Hyatt Regency Hotel-Bethesda, One Bethesda Metro Center, Bethesda, MD.
10-K NOTICE
A copy of the company's Annual Report to the Securities and Exchange Commission
on Form 10-K may be obtained without charge. Please direct your request to
WRIT's Investor Relations Department.
WRIT DIRECT
WRIT's dividend reinvestment and direct stock purchase plan permits cash
investment of up to $25,000 per month, plus dividends, with nominal fees, and is
IRA eligible.
STOCK INFORMATION
WRIT is traded on the New York Stock Exchange. The symbol listed in the
newspaper is WRIT. The trading symbol is WRE.
MEMBER
National Association of Real Estate Investment Trusts(R)
1875 Eye Street, N.W.
Suite 600
Washington, DC 20006-5413
28
WRIT trustees and officers
TRUSTEES
Edmund B. Cronin, Jr.
Chairman, President and
Chief Executive Officer
Director, John J. Kirlin
Companies; Potomac Electric
Power Company
John M. Derrick, Jr.
Chairman and Chief Executive
Officer, Potomac Electric
Power Company
Clifford M. Kendall
Director, Affiliated
Computer Service, Inc.;
VSE Corporation;
Onsite Sourcing, Inc.
John P. McDaniel
Chief Executive Officer,
MedStar Health
Director, AAL/Lutheran
Brotherhood
Charles T. Nason
Chairman and Chief Executive
Officer, Acacia Life Insurance
David M. Osnos
Senior Partner, Arent Fox
Kintner Plotkin & Kahn;
Director, EastGroup Properties;
VSE Corporation
Susan J. Williams
Chief Executive Officer
and President,
Williams Aron & Associates
[PHOTO]
OFFICERS
Edmund B. Cronin, Jr.
Chairman, President and
Chief Executive Officer
George F. McKenzie
Senior Vice President,
Real Estate
Brian J. Fitzgerald
Managing Director,
Leasing
Laura M. Franklin
Managing Director,
Accounting and Administration,
Corporate Secretary
Sara L. Grootwassink
Managing Director,
Finance and Capital Markets
Kenneth C. Reed
Managing Director,
Property Management
Thomas L. Regnell
Managing Director,
Acquisitions
[PHOTO]
WASHINGTON REAL ESTATE
INVESTMENT TRUST
6110 Executive Boulevard
Rockville, Maryland 20852-3927
301-984-9400
800-565-9748
Fax: 301-984-9610
www.writ.com
[CHART]
[PLOT POINTS TO COME]
The graph on the front cover reflects the total return (dividends plus price
appreciation with all dividends reinvested) of WRIT, the S&P 500, the Morgan
Stanley REIT Index, the NASDAQ and the DOW for the period beginning December 31,
1971, and ending December 31, 2001.
COMPARE WRIT'S PERFORMANCE WITH OTHER INDUSTRY LEADERS
$10,000 invested in WRIT since 1971, with dividends reinvested, would be worth
$1,789,000 as of December 31, 2001.