ITEM 1. BUSINESS --------
The Trust
Washington Real Estate Investment Trust ("WRIT" or the "Trust") is a self- administered, self-managed equity real estate investment trust ("REIT"). The Trust's business consists of the ownership and operation of income-producing real properties. The Trust has a fundamental strategy of regional focus, diversification by property type and conservative financial management.
WRIT operates in a manner intended to enable it to qualify as a REIT under the Internal Revenue Code (the "Code"). In accordance with the Code, a trust which distributes its capital gains and at least 95 percent of its taxable income to its shareholders each year, and which meets certain other conditions, will not be taxed on that portion of its taxable income which is distributed to its shareholders. Over the last five years, dividends paid per share have been $1.16 for 1999, $1.11 for 1998, $1.07 for 1997, $1.03 for 1996 and $.99 for 1995. The indicated annualized dividend rate for 2000, based upon the December 31, 1999 dividend, is $1.17. Gains on sale of real estate of $7.9 million in 1999 were tax deferred. Such gains were used to acquire real estate assets and will not be distributed.
WRIT's geographic focus is based on two principles:
1. Real estate is a local business and is much more effectively selected and managed by owners located and expert in the region.
2. Geographic markets deserving of focus must be among the nation's best markets with a strong primary industry foundation but be diversified enough to withstand downturns in its primary industry.
WRIT considers markets to be local if they can be reached from the operations center within two hours by car. WRIT's Washington centered market reaches north to Philadelphia, Pennsylvania and south to Richmond, Virginia. While WRIT has historically focused most of its investments in the Greater Washington-Baltimore Region, in order to maximize acquisition opportunities, WRIT will consider investments within the two-hour radius described above. WRIT also will consider opportunities to duplicate its Washington focused approach in other geographic markets which meet the criteria described above.
All of WRIT's Trustees, officers and employees live and work in the Greater Washington-Baltimore region and WRIT's officers average over 19 years of experience in this region.
The Greater Washington-Baltimore Economy and Real Estate Markets
The Greater Washington-Baltimore area today is an economic machine driven by the federal government at its center and the growth that results from being the #1 high tech center in the nation (see below). The Technology/Biotechnology sector has surpassed the federal government as largest employer in the region, and the Washington region now ranks #1 in the nation in number of high technology firms and number of high technology employees.
Washington, D.C. 12,183 230,660 Silicon Valley 11,930 199,230 Los Angeles 11,058 152,850 New York 7,874 142,410 Boston 7,442 139,400 Atlanta 6,383 98,080 Austin 2,681 44,730
Source: Greater Washington Initiative, December 1999
While federal employment in the region has decreased from 22% in 1970 to 11% in 1999, federal procurement (purchase of goods and services) has continued to grow in the region. Federal procurement in the Washington region totaled $25.7 billion in 1999 making the region #1 in the nation exceeding the combined total of the #2 and #3 metro areas (Los Angeles and St. Louis). Though the region may not be recession proof, this federal procurement makes it substantially better positioned than others to withstand an economic downturn.
Mae East, located in Tysons Corner, Virginia is one of only two Internet convergence centers in the U.S. As a result, it is estimated that up to 60% of the world's Internet traffic flows through Northern Virginia. The presence of Mae East and of the thousands of high tech firms in the area has spawned a concentration of data centers in the region where large Internet and other high tech firms process tremendous amounts of data.
This concentration of high tech companies has served to attract even more high tech firms. Amazon.com, Cisco Systems, Global Crossing and Winstar Communications are all new presences in the Washington-Baltimore market.
Data Centers in the Washington Metro Area ----------------------------------------- AboveNet Global Crossing Amazon.com GTE AOL IBM AT&T Intel Bell Atlantic Interliant Cable & Wireless Mae East Covad MCI/Worldcom/UUNet Digex Pacific Gateway Equinex PSINet Exodus Qwest
Source: Delta Associates/Transwestern Carey Winston
This region serves as the headquarters for several of the largest U.S. and international financial institutions including the World Bank, International Monetary Fund, Inter-American Development Bank, Export-Import Bank, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corp. (Freddie Mac) and Student Loan Marketing Association (Sallie Mae).
Other major public companies headquartered in the region include MCI Worldcom, USAirways, America Online, Marriott International, Lockheed-Martin, Danaher Corp., Lafarge Corp. and Gannett. The region is the second most popular tourist destination in the world. Most importantly, the Mid-Atlantic region is known as a job center, with solid educational opportunities and easy access to leisure time activities.
The region's real estate markets are the beneficiary of this high tech growth. Vacancies are extremely low, and rental rate growth is very strong. At year-end 1999, regional vacancy rates stood at 1.1% in apartments, 2.7% in grocery anchored shopping centers and 5.7% in office buildings. The industrial sector, at 9.2%, is the only sector with a "normal" vacancy level, and some of this vacancy is the result of obsolescence.
The apartment vacancy rate of 1.1% at year-end 1999 was the area's lowest since World War II. The office vacancy rate of 5.7% was the 3rd lowest amongst major metropolitan areas. More importantly, the cities ranked #1 and #2 had vacancy rates only slightly lower than Washington at 5.0% and 5.3% while New York, ranked 4th just behind Washington, had a vacancy rate of 8.8%.
Development underway in the office and apartment sectors is expected to cause an increase in vacancy rates, but Delta Associates/Transwestern Carey Winston projects that office vacancies will only reach the 6% to 8% level at year-end 2001 - still lower than the #4 metro area in the nation today. Delta Associates/Transwestern Carey Winston also projects that apartment vacancies will only reach 4.9% by year-end 2002.
As of December 31, 1999, WRIT owned a diversified portfolio consisting of 12 retail centers, 22 office buildings, 9 apartment buildings and 16 industrial distribution/flex properties. WRIT's principal objective is to invest in high quality real properties in prime locations, then proactively manage, lease, and develop ongoing capital improvement programs to improve their economic performance. The percentage of total real estate rental revenue by property group for 1999, 1998, and 1997 and the percent leased as of December 31, 1999 were as follows:
On a combined basis, WRIT's portfolio was 96% occupied in 1999, 96% occupied in 1998, and 95% occupied in 1997.
Total revenue was $119.0 million for 1999, $103.6 million for 1998 and $79.4 million for 1997. During 1997 through 1999, WRIT acquired eight office buildings, one retail center, two apartment buildings and eight industrial distribution/flex properties for a total of 19 properties. These acquisitions were the primary reason for the shifting of each group's percentage of total revenue reflected above. During 1998 and 1999, WRIT sold two office properties, four industrial/flex properties and one retail center for a total of seven properties. No properties were sold in 1997. No single tenant accounted for more than 3.81% of revenues in 1999, 3.96% of revenue in 1998 and 3.04% of revenue in 1997. Various agencies of the U.S. government are counted separately and include the Department of Commerce, Immigration and Naturalization Service, U.S. Postal Service, Social Security Administration and U.S. Patent Office. All Federal government tenants in the aggregate accounted for approximately 2.1% of WRIT's 1999 total revenue. The larger non-Federal government tenants include Crestar Bank, District of Columbia Metropolitan Police Department, Giant Food, Main Control, Inc., OAO Corporation, Pepsi Cola, Sun Microsystems, Sunrise Assisted Living, Inc., The American Red Cross, Wang Laboratories and Xerox.
As of December 31, 1999, and for the year then ended, the 7900 Westpark office building accounted for 13% of total assets based upon book value and 9% of total revenues. No other single property accounted for more than 10% of total assets or total revenues.
During 1998 and prior, the actual day-to-day property management functions at the properties owned by the Trust were carried out by an independent management company whose only client was WRIT. No WRIT Trustee or officer was a director or owned any interest in the management company. Effective December 31, 1998, WRIT acquired substantially all of the operations of the management company and took over the property management functions of the properties.
The Trust expects to continue investing in additional income producing properties. WRIT invests only in properties which management believes will increase in income and value. WRIT's properties compete for tenants with other properties throughout the respective areas in which they are located. All properties compete for tenants on the basis of location, quality and rental rates.
WRIT makes capital improvements on an ongoing basis to its properties for the purpose of maintaining and increasing their values and income. Major improvements and/or renovations to the properties in 1999 and 1998 are discussed on page 10.
Further description of the property groups is contained in Item 2, Properties and in Schedule III. Reference is also made to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
The number of persons employed by the Trust was 243 as of February 4, 2000, including 175 persons engaged in property management functions and 68 persons engaged in corporate, financial, leasing, and asset management functions.
ITEM 2.
ITEM 2. PROPERTIES ----------
The schedule on the following page lists the Trust's real estate investment portfolio as of December 31, 1999, which consisted of 59 properties.
As of December 31, 1999, the percent leased is the percentage of net rentable space for which fully executed leases exist and may include signed leases for space not yet occupied by the tenant.
Cost information is included in Schedule III to WRIT's financial statements included in this Form 10-K Annual Report.
SCHEDULE OF PROPERTIES ----------------------
/1/ A 49,000 square foot addition to 7900 Westpark Drive was completed in September 1999. /2/ Property was sold subsequent to December 31, 1999. /3/ Property is in the planning stages of redevelopment. /*/ Apartment buildings are presented in gross square feet.
SCHEDULE OF PROPERTIES (Cont.) ------------------------------
OFFICE BUILDINGS - ----------------
Operating income in WRIT's core group of office buildings (excluding 1998 and 1999 acquisitions and dispositions) increased 7% from 1998 to 1999. This increase was a result of strong rental rate growth and moderate occupancy gains generally 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 2000.
During 1999, WRIT's office building revenues and operating income increased by 20% and 23% respectively, over 1998. These increases were primarily due to 1999 acquisitions (600 Jefferson Plaza, 1700 Research Boulevard and Parklawn Plaza) and 1998 acquisitions (8230 Boone Boulevard and Woodburn Medical Park I and II) combined with the 7% core group operating income increase described above.
Economic occupancy rates for the core group of office buildings averaged 97% for both 1999 and 1998.
Rental rate increases of 5% for the sector were the result of increases at nearly all of the properties. During 1999, WRIT executed new office leases for 645,000 square feet of office space at an average face rent increase of 18% on a non-straight line basis.
Further details about the performance of the office building sector in 1999 and 1998 are provided in Management's Discussion and Analysis commencing on page 14.
INDUSTRIAL/FLEX PROPERTIES - --------------------------
Operating income in WRIT's core group of industrial/flex properties (excluding 1999 and 1998 acquisitions and dispositions) increased 5%. Economic occupancy rates for the core group of industrial/flex properties averaged 97% in 1999 compared to 95% in 1998.
During 1999, WRIT's industrial/flex properties revenues and operating income increased by 20% and 16%, respectively, over 1998. These increases were primarily due to 1999 acquisitions (Dulles South IV, Sully Square and Amvax) and 1998 acquisitions (Northern Virginia Industrial Park and 8900 Telegraph Road) combined with the 5% core portfolio operating income increase described below.
Rental rate increases of 5% for the sector were the result of increases at the majority of the properties. During 1999, WRIT executed 446,000 square feet of new industrial/ flex space leases at an average face rent increase of 9% on a non-straight line basis.
Further details about the performance of the industrial/flex properties sector in 1999 and 1998 are provided in Management's Discussion and Analysis commencing on page 14.
RETAIL CENTERS - --------------
Operating income in WRIT's core retail centers (excluding 1999 and 1998 acquisitions and dispositions) increased 6% from 1998 to 1999. Retail center rental rates for this same group increased 3% in 1999 over 1998.
During 1999, WRIT's retail center revenues and operating income increased by 4% and 2%, respectively, over 1998. Economic occupancy rates for the core group of retail center properties (excluding 1999 and 1998 acquisitions and dispositions) averaged 96% in 1999 compared to 95% in 1998.
Further details about the performance of the retail center sector in 1999 and 1998 are provided in Management's Discussion and Analysis commencing on page 14.
APARTMENT BUILDINGS - -------------------
During 1999, WRIT's apartment revenues and operating income increased by 8% and 9%, respectively, over 1998. These increases were primarily due to the 1999 acquisition of Avondale Apartments combined with the 7% operating income increase described below.
WRIT's apartment sector core group operating income (excluding the Avondale Apartments acquired in 1999) increased 7%. This increase was the result of increased occupancy levels combined with 4% rental rate increases throughout the group. Economic occupancy rates for the core group of apartments averaged 97% in 1999 and 95% in 1998.
Further details about the performance of the apartment sector in 1999 and 1998 are provided in Management's Discussion and Analysis commencing on page 14.
PROPERTY EXPANSIONS & MAJOR RENOVATIONS - ---------------------------------------
BRADLEE SHOPPING CENTER - -----------------------
The facade renovation that began in 1998 was completed in June 1999. Included in the renovation was the retenanting of the former 26,640 square-foot GC Murphy space. The new leases associated with this space have a blended rate per square foot of $15.28, which is approximately six times the former GC Murphy rent of $2.42 per square foot. The total cost of the renovation was approximately $3.1 million, of which $1.1 million was incurred in 1999.
7900 WESTPARK DRIVE - -------------------
In 1999, WRIT completed construction of a 49,000 square-foot office space addition to its 7900 Westpark Drive office building in McLean, Virginia. This addition commenced in 1998 and was built over the existing structured parking deck, similar to the Trust's 1996 addition at 7700 Leesburg Pike. The addition was 100% leased and occupied upon completion in October 1999. The total cost of the addition will be approximately $7.5 million, of which $4.9 million was incurred in 1999.
PROPERTY DISPOSITIONS - ---------------------
During 1999, WRIT sold four real estate properties: 444 North Frederick Avenue, Arlington Financial Center, Department of Commerce Industrial Center and V Street Distribution Center. The total gain on the sales of these properties was $7.9 million. Net proceeds from the sales of these properties of $22.0 million were used to invest in other real estate properties acquired by WRIT in 1999.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND ---------------------------------------------- RELATED STOCKHOLDER MATTERS ---------------------------
Effective January 4, 1999, the Trust's shares began trading on the New York Stock Exchange.
From 1971 through December 31, 1998, the Trust's shares were traded on the American Stock Exchange. There are approximately 37,000 shareholders. The Trust's shares were split 3-for-1 in March 1981, 3-for-2 in July 1985, 3-for-2 in December 1988, and 3-for-2 in May 1992.
The high and low sales price for the Trust's shares for 1999 and 1998, by quarter, and the amount of dividends paid by the Trust are as follows:
The Trust has historically paid dividends on a quarterly basis. Dividends are normally paid based on the Trust's cash flow from operating activities. The 2000 indicated annual dividend rate is $1.17 based on the annualization of the March 31, 2000 dividend.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA ------------------------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
RESULTS OF OPERATIONS - ---------------------
REAL ESTATE RENTAL REVENUE: 1999 VERSUS 1998 - --------------------------------------------
Total revenues for 1999 increased $15.4 million, or 15%, to $119.0 million from $103.6 million in 1998. The percentage increase in real estate rental revenue from 1998 to 1999 by property type was as follows:
Office Buildings 20% Retail Centers 4% Apartment Buildings 8% Industrial/Flex Properties 20%
During 1999, WRIT's office building revenues and operating income increased by 20% and 23%, respectively, over 1998. These increases were primarily due to 1999 acquisitions (600 Jefferson Plaza and 1700 Research) and 1998 acquisitions (8230 Boone Boulevard and Woodburn Medical Park I and II) combined with increased rental rates and occupancy for the sector and offset in part by the 1999 sales of Arlington Financial Center and 444 N. Frederick Road.
During 1999, WRIT's retail center revenues and operating income increased by 4% and 2%, respectively, over 1998. The change is primarily attributable to increased rental rates and tenant recovery income offset by the December 1998 sale of Dover Mart retail center.
WRIT's apartment building revenues and operating income increased by 8% and 9%, respectively, in 1999 over 1998. 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 industrial/flex property revenues and operating income increased by 20% and 16%, respectively, in 1999 over 1998. These increases were primarily due to 1999 acquisitions (Dulles South IV and Amvax) and 1998 acquisitions (Northern Virginia Industrial Park and 8900 Telegraph Road) as well as increased rental rates, offset in part by the 1999 sales of the Department of Commerce Industrial Center and V Street Distribution Center.
REAL ESTATE RENTAL REVENUE: 1998 VERSUS 1997 - --------------------------------------------
Total revenues for 1998 increased $24.2 million, or 30%, to $103.6 million from $79.4 million in 1997. The percentage increase in real estate rental revenue from 1997 to 1998 by property type was as follows:
Office Buildings 43% Retail Centers 13% Apartment Buildings 17% Industrial/Flex Properties 37%
During 1998, WRIT's office building revenues and operating income increased by 43% and 48%, respectively, over 1997. These increases were primarily due to 1998 acquisitions (8230 Boone Boulevard and Woodburn Medical Park I and II) and 1997 acquisitions (1600 Wilson Boulevard and 7900 Westpark Drive) combined with increased rental rates and occupancy for the sector.
During 1998, WRIT's retail center revenues and operating income increased by 13% and 17%, respectively, over 1997. These increases were primarily due to the 1998 acquisition of 800 South Washington Street retail center combined with increased rental rates and increased tenant recovery income.
WRIT's apartment building revenues and operating income increased by 17% and 20%, respectively, in 1998 over 1997. These increases were primarily due to the 1997 acquisition of Bethesda Hill Apartments, combined with increased rental rates across the sector.
WRIT's industrial/flex property revenues and operating income increased by 37% and 39%, respectively, in 1998 over 1997. These increases were primarily due to 1998 acquisitions (Northern Virginia Industrial Park and 8900 Telegraph Road) and 1997 acquisitions (Ammendale Technology Parks I and II and Pickett Industrial Park), offset in part by the 1998 sales of Shirley 395 and Ravensworth.
OPERATING EXPENSES AND OTHER RESULTS OF OPERATIONS - --------------------------------------------------
Real estate operating expenses as a percentage of revenue were 30% for 1999 and 1998 as compared to 32% for 1997. The decrease in 1998 compared to 1997 is attributable to a 42% revenue increase in WRIT's office building segment resulting from 1998 and 1997 property acquisitions and increased occupancy and rental rates, combined with only a 32% increase in the office building segment's operating expenses. WRIT's percentage of revenue from office buildings within its entire real estate portfolio has increased to 52% at December 31, 1999, from 50% at December 31, 1998 and 45% at December 31, 1997. The increase is attributable to 1999 and 1998 office building acquisitions. Generally, real estate operating expenses have increased to $35.3 million in 1999 from $31.1 million in 1998 and $25.5 million in 1997 due to the acquisition of seven real estate properties in 1999 and six real estate properties in each of 1998 and 1997.
Interest expense increased $5.2 million in 1999 from 1998. This increase is primarily attributable to the assumption of an $8.7 million mortgage in September 1999 in connection with the acquisition of Avondale Apartments, the issuance of $110.0 million in medium-term notes in February 1998, and the assumption of $21.6 million in mortgages in November 1998 in connection with the acquisition of Woodburn Medical Park. In addition, WRIT closed on a $50.0 mortgage note in September 1999 at 7.14% interest rate that was used to pay down WRIT's unsecured lines of credit at slightly lower interest rates. Interest expense increased $7.4 million in 1998 from 1997. This increase was attributable to the issuance of the $110 million medium-term notes in February 1998 and an increase in the average balance of outstanding line of credit advances due to acquisitions in 1998 and 1997.
General and administrative expenses were $6.2 million for 1999 as compared to $6.6 million for 1998 and $4.2 million for 1997. The decrease in general and administrative expenses in 1999, as compared to 1998, is primarily attributable to increased property management profits that in turn reduce the administrative expenses of the Trust. The increase in general and administrative expenses in 1998 from 1997 was attributable to increased compensation from personnel additions due to the increased portfolio of the Trust.
CAPITAL RESOURCES AND LIQUIDITY - -------------------------------
WRIT has utilized the proceeds of share offerings, unsecured and secured debt offerings, 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 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 to pay off any outstanding advances on the Trust's lines of credit and/or for new acquisitions and capital improvements.
As of December 31, 1999, WRIT had line of credit commitments in place from commercial banks for up to $75 million, which bear interest at an adjustable spread over LIBOR based on the Trust's interest coverage ratio and public debt rating. WRIT acquired seven properties for a total acquisition cost of $61.9 million in 1999, and acquired six properties for total acquisition costs of $82.2 million in 1998. The 1999 acquisitions were financed through line of credit advances, the use of proceeds from property sales in February 1999 and the assumption of a mortgage payable of $8.7 million. The 1998 acquisitions were primarily financed through line of credit advances, the February 1998 issuance of $110 million of medium-term notes (after repayment of amounts outstanding on line-of-credit borrowings of $95 million), the assumption of mortgages payable amounting to $21.6 million and the reinvestment of the proceeds of the sale of three properties in 1998 of $10.8 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 five of WRIT's Virginia residential properties.
On February 20, 1998, WRIT sold $50 million of 7.25% unsecured notes due February 25, 2028 at 98.653% to yield approximately 7.36%. WRIT also sold $60 million of 6.898% unsecured Mandatory Par Put Remarketed Securities ("MOPPRS") at an effective borrowing rate through the remarketing date (February 2008) of approximately 6.74%. WRIT used the proceeds of these notes for general business purposes, including repayment of $95 million of outstanding advances under its lines of credit. WRIT used the remainder of the proceeds to finance acquisitions and capital improvements to its properties. WRIT had four interest rate lock agreements related to this transaction which settled for $5.4 million and treated that settlement and the cost of a related interest rate cap agreement as transaction costs of the borrowing. These costs are being amortized over the life of the unsecured notes using the effective interest rate method.
Cash flow from operating activities totaled $52.4 million, $53.6 million and $42.5 million for the years ended December 31, 1999, 1998 and 1997, respectively, including net income of $44.3 million (net of $7.9 million gain on property sales), $41.1 million (net of $6.8 million gain on property sales) and $30.1 million, respectively, and depreciation and amortization of $19.6 million, $15.4 million and $10.9 million, respectively. The decrease in cash flows from operating activities in 1999 from 1998 is primarily due to the timing of payments for trade accounts payable. The increase in cash flows from operating activities in 1998 from 1997 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 $50.0 million, $68.9 million and $152.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. The decline in cash flows used in investing activities in 1999 from 1998 and in 1998 from 1997 is attributable to a reduction in real estate acquisitions.
Cash flows used in financing activities were $2.4 million for the year ended December 31, 1999, compared to cash flows provided by financing activities of $12.0 million and $116.4 million for the years ended December 31, 1998 and 1997, respectively. Cash flows used in financing activities in 1999 declined from 1998 as a result of increased dividend payments in 1999, line of credit repayments in excess of advances and no debt issuance in 1999. Cash flows provided by financing activities declined in 1998 from 1997 due to line of credit repayments in excess of advances, offset by net proceeds from the debt offering in 1998.
Rental revenue has been the principal source of funds to pay WRIT's operating expenses, interest expense and dividends to shareholders. In 1999, 1998 and 1997, WRIT paid dividends totaling $41.3 million, $39.6 million and $36.1 million, respectively.
CAPITAL IMPROVEMENTS - --------------------
Capital improvements of $17.8 million were completed in 1999, including tenant improvements. Capital improvements to WRIT properties in 1998 and 1997 were approximately $18.7 million and $13.9 million, respectively.
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 1999, the most significant of these improvements were made to the 7900 Westpark Drive, Woodburn Medical Park, Bethesda Hill Apartments, Ammendale Technology Park II and Northern Virginia Industrial Park.
Expansions/Additions and Major Renovations - Expansions/Additions increase the rentable area of a property. During 1999, WRIT completed the 49,000 square foot addition at 7900 Westpark Drive. Major Renovations are improvements sufficient to increase the income otherwise achievable at a property. During 1999, WRIT completed the renovation of the Bradlee Shopping Center. See Expansions and Major Renovations on Page 10 of this report for descriptions of these 1999 projects.
Tenant Improvements - Tenant Improvements are costs associated with commercial lease transactions such as painting and carpeting. During 1999, WRIT's average Tenant Improvement Costs per square foot of space leased were as follows:
Office $4.59 Retail $0.69 Industrial $0.55
The Retail and Industrial Tenant Improvement costs are substantially lower than Office Improvement costs because the tenant improvements required in these property types are substantially less extensive than in offices. WRIT's office tenant improvement costs are among the lowest in the industry for a number of reasons. Approximately 66% of our office tenants renew their leases with WRIT, and renewing tenants generally require minimal tenant improvements. In addition, lower tenant improvement costs is 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.
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 our 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 $759 for the 724 apartments turned over in 1999. WRIT also expensed an average of $303 per apartment turnover for items which do not have a long-term life and are, therefore, not capitalized.
During 1999, WRIT's capital improvement costs were as follows (in thousands):
Accretive capital improvements: Acquisition related $ 5,716 Expansions and major renovations 5,929 Tenant improvements 2,342 ------- Total Accretive capital improvements 13,987 Other: 3,752 ------- Total $17,739 =======
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.
YEAR 2000 - ---------
WRIT's Year 2000 Project completion resulted in no interruption or failure of normal business activities or operations. No material failures or significant interruptions were experienced that materially or adversely affected WRIT's results of operations, liquidity or financial condition. The total costs incurred to become Year 2000 compliant were not material to WRIT's financial position. Any future cost associated with Year 2000 compliancy is not expected to be material to WRIT's financial position.
FORWARD-LOOKING STATEMENTS - --------------------------
This Annual Report on Form 10-K 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; (c) WRIT's belief that renovations and other changes at the Bradlee Shopping Center will increase traffic and enable it
to raise rents; (d) 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; (e) 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 (f) 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 they may enter, including the effects of changes in Federal government spending; (c) inflation; (d) consumer confidence; (e) unemployment rates; (f) consumer tastes and preferences; (g) stock price and interest rate fluctuations; (h) WRIT's future capital requirements; (i) competition; (j) compliance with applicable laws, including those concerning the environment and access by persons with disabilities; (k) weather conditions and (l) 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:
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ----------------------------------------------------------
The only material 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
The financial statements and supplementary data listed under Item 14 (a) and filed as part of this report on the pages indicated are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None.
PART III
Certain information required by Part III is omitted from this report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") no later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Performance Graph included in the Proxy Statement.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ---------------------------------------------------
The information required by this Item is hereby incorporated herein by reference to WRIT's 2000 Annual Meeting Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ----------------------
The information required by this Item is hereby incorporated herein by reference to WRIT's 2000 Annual Meeting Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
The information required by this Item is hereby incorporated herein by reference to WRIT's 2000 Annual Meeting Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -----------------------------------------------
The information required by this Item is hereby incorporated herein by reference to WRIT's 2000 Annual Meeting Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ---------------------------------------------------------------
ITEM 14 (a). The following documents are filed as part of this Report:
1. Financial Statements: The following Financial Statements of Washington -------------------- Real Estate Investment Trust and Reports of Independent Accountants are included in this report:
Report of Arthur Andersen LLP.
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules: The following financial statement schedules ----------------------------- of Washington Real Estate Investment Trust for the periods indicated are filed as part of this Report and should be read in conjunction with the Financial Statements of Washington Real Estate Investment Trust.
Schedule Page - -------- ----
III Real Estate and Accumulated Depreciation 44
Supplementary Information: Quarterly Financial Results (unaudited) 45
Schedules not listed above have been omitted because they are not applicable, are not required or the information to be set forth therein is included in the Financial Statements or Notes thereto.
3. Exhibits: --------
3. Declaration of Trust and Bylaws
(a) Declaration of Trust. Incorporated herein by reference to Exhibit 3 to the Trust's registration statement on Form 8-B dated July 10, 1996.
(b) Bylaws. Incorporated herein by reference to Exhibit 4 to the Trust's registration statement on Form 8-B dated July 10, 1996.
(c) Amendment to Declaration of Trust dated September 21, 1998. Incorporated herein by reference to Exhibit 3 to the Trust's Form 10-Q dated November 13, 1998.
(d) Articles of Amendment to Declaration of Trust dated June 24, 1999 incorporated by reference to Exhibit 4c to Amendment No. 1 to the Trust's Form S-3 registration statement filed with the Securities and Exchange Commission as of July 14, 1999.
4.
(a) Credit agreement dated March 1, 1995 between Washington Real Estate Investment Trust, as borrower, The First National Bank of Chicago, as lender, and The First National Bank of Chicago as agent. The credit agreement was amended and restated as of March 17, 1999 and is attached hereto.
(b) Credit agreement dated July 17, 1998, among Washington Real Estate Investment Trust, as borrower, Crestar Bank, as lender, First Union National Bank (successor by merger to Signet Bank), as lender, and Crestar Bank, as agent. The credit agreement was amended and restated as of July 25, 1999 and is attached hereto.
(c) Indenture dated as of August 1, 1996 between Washington Real Estate Investment Trust and The First National Bank of Chicago.*
(d) Officers' Certificate Establishing Terms of the Notes, dated August 8, 1996.*
(e) Form of 2003 Notes.*
(f) Form of 2006 Notes.*
(g) Form of MOPPRS Notes.****
(h) Form of 30 year Notes.****
(i) Remarketing Agreement.****
(j) The Trust is a party to a number of other instruments defining the rights of holders of long-term debt. No such instrument authorizes an amount of securities in excess of 10 percent of the total assets of the Trust and its Subsidiaries on a consolidated basis. On request, the Trust agrees to furnish a copy of each such instrument to the Commission.
10. Management contracts, plans and arrangements
(a) Employment Agreement dated May 11, 1994 with Edmund B. Cronin, Jr.**
(b) 1991 Incentive Stock Option Plan, as amended.**
(c) Nonqualified Stock Option Agreement dated June 27, 1990 with B. Franklin Kahn.**
(d) Nonqualified Stock Option Agreement dated December 14, 1994 with Edmund B. Cronin, Jr.**
(e) Nonqualified Stock Option Agreement dated December 19, 1995 with Edmund B. Cronin, Jr. Incorporated herein by reference to Exhibit 10(e) to the 1995 Form 10-K.
(f) Share Grant Plan.***
(g) Share Option Plan for Trustees.***
21. Subsidiaries of Registrant
In 1995, WRIT formed a subsidiary partnership, WRIT Limited Partnership, a Maryland limited partnership, in which WRIT owns 100% of the partnership interest.
In 1998, WRIT formed a subsidiary limited liability company, WRIT-NVIP, L.L.C., a Virginia limited liability company, in which WRIT owns 93% of the company interests.
In 1998, WRIT formed a subsidiary company, Real Estate Management, Inc., a Maryland corporation, in which WRIT owns 100% of the stock.
22. Consents
(a) Consent of Arthur Andersen LLP
27. Financial Data Schedules
(a) 1999 financial data schedule
ITEM 14 (b). REPORTS ON FORM 8-K
(1) October 5, 1999 - Report pursuant to Item 2 on the acquisition of 1700 Research Boulevard, 600 Jefferson Plaza and Avondale Apartments.
(2) November 30, 1999 - Report pursuant to Item 7 to provide the financial statements required to be included in the Current Report on Form 8-K dated October 5, 1999 in connection with the acquisition of 1700 Research Boulevard, 600 Jefferson Plaza and Avondale Apartments.
* Incorporated herein by reference to the Exhibit of the same designation to the Trust's Form 8-K filed August 13, 1996.
** Incorporated herein by reference to the Exhibit of the same designation to Amendment No. 2 to the Trust's Registration Statement on Form S-3 filed July 17, 1995.
*** Incorporated herein by reference to Exhibits 4(a) and 4 (b), respectively, to the Trust's Registration Statement on Form S-8 filed on March 17, 1998.
**** Incorporated herein by reference to the Exhibit of the same designation to the Trust's Form 8-K filed February 25, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WASHINGTON REAL ESTATE INVESTMENT TRUST
Date: March 24, 2000 /s/ Edmund B. Cronin, Jr. By: _____________________________________ Edmund B. Cronin, Jr. President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule included on pages 42 through 45 of the Form 10-K is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Vienna, Virginia February 4, 2000
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of these statements.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these statements.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
The accompanying notes are an integral part of these statements.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
Supplemental schedule of non-cash investing and financing activities - --------------------------------------------------------------------
* On September 20, 1999, WRIT purchased Avondale Apartments for an acquisition cost of $13.0 million. WRIT assumed a mortgage in the amount of $8.7 million and paid the balance in cash. The $8.7 million of assumed mortgage is not included in the $53.2 million amount shown as 1999 real estate acquisitions.
* On November 30, 1998, WRIT purchased Woodburn Medical Park I and II for an acquisition cost of $35.2 million. WRIT assumed two mortgages in the amount of $9.2 million and $12.4 million and paid the balance in cash. The $21.6 million is not included in the $59.1 million shown as 1998 real estate acquisitions.
The accompanying notes are an integral part of these statements.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Nature of Business:
Washington Real Estate Investment Trust ("WRIT" 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 properties.
WRIT operates in a manner intended to enable it to qualify as a real estate investment trust under the Internal Revenue Code (the "Code"). In accordance with the Code, a trust which distributes its capital gains and at least 95 percent of its taxable income to its shareholders each year, and which meets certain other conditions, will not be taxed on that portion of its taxable income which is distributed to its shareholders. Accordingly, no provision for Federal income taxes is required.
In June 1996, WRIT changed its domicile from the District of Columbia to the State of Maryland. Issued and outstanding shares were assigned a par value of $.01 per share.
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.
Revenue Recognition
Residential properties are leased under operating leases with terms of generally one year or less, and commercial properties are leased under operating leases with average terms of three to five years. WRIT recognizes rental income and rental abatements from its residential and commercial leases when earned in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13.
Deferred Financing Costs
Costs associated with the issuance of senior subordinated notes and draws on lines of credit are capitalized and amortized using the effective interest rate method over the term of the related notes.
Real Estate and Depreciation
Real estate assets are recorded at cost. Buildings are depreciated on a straight-line basis over estimated useful lives not exceeding 50 years. Effective January 1, 1995, WRIT revised its estimate of useful lives for major capital improvements to real estate. All capital improvement expenditures associated with replacements, improvements or major repairs to real property are depreciated using the straight-line method over their estimated useful lives ranging from 3 to 30 years. All tenant improvements are amortized using the straight-line method over 5 years or the term of the lease if it differs significantly from 5 years. Capital improvements placed in service prior to January 1, 1995 will continue to be depreciated on a straight-line basis over their previously estimated useful lives not exceeding 30 years. Maintenance and repair costs are expensed as incurred.
WRIT evaluates quarterly the carrying value of its long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In cases where management is holding particular properties for sale, the Trust assesses impairment based on whether the fair value (estimated sales price less costs of disposal) of each individual property to be sold is less than the net book value. A
property is considered to be held for sale when the Trust has made the decision to dispose of the property. Otherwise, the Trust assesses impairment of its real estate properties based on whether it is probable that undiscounted future cash flows from each individual property will be less than its net book value. If a property is determined to be impaired, its basis is adjusted to its fair market value. There were no property impairments recognized during the three-year period ending December 31, 1999.
Cash and Cash Equivalents
Cash and cash equivalents include investments readily convertible to known amounts of cash with original maturities of 90 days or less.
Interest Rate Protection Agreements
WRIT has entered into interest rate protection agreements 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. To qualify for hedge accounting, the interest rate protection agreement must meet two criteria: (i) the debt to be hedged exposes WRIT to interest rate risk and (ii) the interest rate protection agreement reduces WRIT's exposure to interest rate risk. 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. Additionally, in the event that interest rate protection agreements do not qualify as hedges, such agreements are reclassified to investments accounted for at fair value, with any gain or loss included as a component of income.
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
During 1997, WRIT adopted SFAS No. 128, "Earnings per Share." This statement requires the computation and reporting of both "basic" and "diluted" 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 year ended December 31, 1999, 1998 and 1997, was 35.7, 35.7 and 33.4 million shares, respectively. There was no impact of dilution of common equivalent shares on the basic weighted-average shares outstanding for the years ended December 31, 1999, 1998 and 1997.
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.
New Statements of Financial Accounting Standards
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure to a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. SFAS No. 137 amended the effective date of SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Although currently WRIT has no derivative instruments, this statement could affect derivative instruments acquired by WRIT in future periods.
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, -------------------------- 1999 1998 -------- -------- (In thousands) Office buildings $352,145 $323,152 Retail centers 97,004 95,017 Apartment buildings 99,125 83,163 Industrial distribution/flex properties 113,596 97,542 -------- -------- $661,870 $598,874 ======== ========
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, residential, retail and industrial/flex properties. 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.
As of December 31, 1999, 7900 Westpark office building accounted for 13 percent of total 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.
Properties acquired by WRIT during the year ending December 31, 1999 are as follows:
WRIT accounted for each acquisition using the purchase method of accounting.
Properties sold by WRIT during the year ending December 31, 1999 are as follows:
4. Mortgage Notes Payable:
On August 22, 1995, WRIT assumed a $7.8 million mortgage note payable as partial consideration for its acquisition of Frederick County Square retail center. The mortgage bears interest at 9 percent. Principal and interest are payable monthly until January 1, 2003, at which time all unpaid principal and interest are payable in full.
On November 30, 1998, WRIT assumed a $9.2 million mortgage note payable and a $12.4 million mortgage note payable as partial consideration for its acquisition of Woodburn Medical Park I and II. Both mortgages bear interest at 7.69 percent per annum. Principal and interest are payable monthly until September 15, 2005, at which time all unpaid principal and interest are payable in full.
On September 20, 1999, WRIT assumed an $8.7 million mortgage note payable as partial consideration for its acquisition of 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 received on the Unsecured Lines of Credit Payable.
Annual maturities of principal as of December 31, 1999 are as follows:
(In thousands) -------------- 2000 $ 768 2001 833 2002 902 2003 7,376 2004 820 Thereafter 76,338 -------- $87,037 =======
5. Unsecured Lines of Credit Payable:
During 1999, WRIT maintained two unsecured lines of credit: a $25 million line of credit ("Credit Facility No. 1") and a $50 million line of credit ("Credit Facility No. 2").
Credit Facility No. 1
WRIT had $22 and $0 million outstanding as of December 31, 1999 and 1998, respectively, related to Credit Facility No. 1.
The following advances have been made under this commitment:
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 termination date to March 17, 2002. Under the amended agreement, WRIT may take 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.
This $25 million credit commitment requires WRIT to pay the lender an unused commitment fee at the rate of 0.375 percent per annum on the amount by which the $25 million commitment exceeds the balance of outstanding advances and term loans. At December 31, 1999 and 1998, $3 million and $25.0 , respectively, of this commitment was unused and available for subsequent acquisitions or capital improvements. This fee is paid quarterly. 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, 1999. 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 $11 million and $44 million outstanding as of December 31, 1999 and 1998, respectively, related to Credit Facility No. 2.
The following advances have been made under this commitment:
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.
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 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 million commitment exceeds the balance of outstanding advances and term loans. At December 31, 1999 and 1998, $39 million and $6 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, 1999.
Bridge Loan
During 1997, WRIT temporarily expanded one of its lines of credit to provide up to an additional $20.25 million through February 27, 1998, at which time it was repaid. The bridge loan accrued interest at LIBOR plus 0.70 percent. At February 27, 1998 and December 31, 1997, the interest rate was 8.50 percent and 6.64 percent, respectively.
WRIT was required to pay a commitment fee equal to 0.10 percent of the commitment. The bridge loan also required WRIT to pay the lender an unused commitment fee at the rate of 0.175 percent on the amount that the $20.25 million commitment exceeded the balance of outstanding advances.
Information related to short-term borrowings are as follows (in thousands):
1999 1998 ------ ------ Maximum Amount Outstanding $72,000 $95,250 Average Amount Outstanding 50,847 29,547 Weighted Average Interest Rate 5.93% 6.38%
6. Senior and Medium-Term Notes Payable:
Senior Notes
On August 8, 1996, WRIT entered into an underwriting agreement to sell $50 million of 7.125 percent 7-year unsecured notes due August 13, 2003, and $50 million of 7.25 percent unsecured 10-year notes due August 13, 2006. This transaction closed on August 13, 1996. 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. In 1996, WRIT used the proceeds of these notes to pay down its lines of credit and to finance acquisitions and capital improvements to its properties. These notes also contain certain financial covenants including debt service coverage and permitted indebtedness ratios which WRIT has met as of December 31, 1999.
Medium-Term Notes
On February 20, 1998, WRIT sold $50 million of 7.25 percent unsecured notes due February 25, 2028 at 98.653 percent to yield approximately 7.36 percent. WRIT also sold $60 million in unsecured Mandatory Par Put Remarketed Securities ("MOPPRS") at an effective borrowing rate through the remarketing date (February 2008) of approximately 6.74 percent. 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 settled interest rate lock agreements for $5.4 million and treated the cost of the interest rate caps as a transaction cost of the borrowing. These costs are amortized over the life of the unsecured notes using the effective interest rate method. These notes also contain certain financial covenants including debt service coverage and permitted indebtedness ratios, which WRIT has met as of December 31, 1999.
7. Shares of Beneficial Interest and Dividends:
In August 1997, WRIT received $61.1 million from the public sale of 3,750,000 shares. WRIT's offering costs were approximately $200,000, resulting in net proceeds received by the Trust of $60.9 million. Approximately $23.0 million of the net proceeds was used to repay certain borrowings outstanding under the Trust's lines of credit resulting from 1997 property acquisitions. The balance of the net proceeds was used to acquire income producing properties and for capital improvements.
The following is a breakdown of the taxable percentage of WRIT's dividends for 1999, 1998 and 1997, respectively:
Ordinary Income Return of Capital --------------- ----------------- 1999 100% 0% 1998 98% 2% 1997 93% 7%
8. Share Options and Grants:
WRIT maintains an Incentive Stock Option Plan (the "Plan"), which includes qualified and non-qualified options. As of December 31, 1999, 1.5 million shares may be awarded to eligible employees. Under the Plan, options, which are issued at market price on the date of grant, vest after not more than two years and expire ten years following the date of grant. Options may be granted under the Plan at any time prior to June 25, 2001. Activity under the Plan is summarized below:
560,000 of the exercisable options outstanding at December 31, 1999 have exercise prices between $12.410 and $20.625, with a weighted-average exercise price of $16.54 and a weighted average remaining contractual life of 7.53 years. The remaining 713,000 options have exercise prices between $14.47 and $17.59, with a weighted average exercise price of $15.35 and a remaining contractual life of 9.72 years.
WRIT accounts for the Plan and the non-qualified share options granted under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans 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:
Because the method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro-forma compensation may not be representative of that to be expected in future years. 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. There was no impact of dilution of common equivalent shares on the basic weighted-average shares outstanding for the years ended December 31, 1999, 1998 and 1997.
During 1999 and 1998, WRIT issued 12,299 and 9,692 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. Share grants are awarded by the compensation committee of the Board of Trustees.
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 Share Option Plan and share grants under the Share Grant Plan based on performance. The financial incentives to management are earned after WRIT has achieved a prescribed level of growth. This plan is effective from 1996 forward and is reviewed by the Board of Trustees' Compensation Committee each year.
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. Since there are no further benefit accruals provided under the plan, WRIT has substantially reduced its funding obligation and there will be no further increases in the ABO or PBO. Benefits under the plan were generally based on years of service and final average pay. Pension costs are accrued and funded annually from plan entry date in the plan to projected retirement date and include service costs for benefits earned during the period and interest costs on the projected benefit obligation less the return on plan assets. The effects of the pension plan are immaterial to WRIT's financial statements.
10. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards 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, 1999. 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, 1999, 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, 1999.
Cash and cash equivalents
Includes cash and commerical 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 published rates or 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.
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 and $60 million unsecured Mandatory Par Put Remarketed Securities with an effective yield of 6.74%. The fair value of these securities is estimated based on published rates or dealer quotes for securities with similar terms and characteristics.
11. Rentals Under Operating Leases:
Noncancellable commercial operating leases provide for minimum rental income during each of the next five years of approximately $79.6 million, $69.0 million, $50.6 million, $38.0 million, $27.0 million and $63.0 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 $425,000, $462,000 and $351,000 in 1999, 1998 and 1997, respectively.
12. Contingencies:
In the normal course of business, WRIT is involved in various types of pending or unasserted claims. In the opinion of management, these claims will not have a material impact on the financial condition or future operations of the Trust.
13. Segment Information:
WRIT has four reportable segments: Office Buildings, Industrial/Flex Properties, Apartment Buildings, and Retail Centers. Office Buildings represent 52 percent of real estate rental revenue and provide office space for various types of businesses. Industrial/Flex Properties represent 14 percent of real estate rental revenue and are used for warehousing and distribution. Apartment Buildings represent 19 percent of real estate rental revenue and provide housing for families throughout the Washington Metropolitan area. Retail Centers represent 15 percent of real estate rental revenue and are retail outlets for a variety of stores.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. WRIT evaluates performance based upon income from real estate from the combined properties in each segment.
WRIT's reportable segments are a consolidation of related properties, which offer different products. They are managed separately because each segment requires different operating, pricing and leasing strategies. All of the properties have been acquired separately and are incorporated into the applicable segment.
14. Subsequent Event (Unaudited):
Subsequent to December 31, 1999, WRIT closed on the sale of Prince William Plaza. On February 29, 2000, WRIT sold this property for $2.8 million resulting in a gain of $1.5 million. WRIT intends to use these proceeds to purchase other real estate assets.
Schedule III
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
SUMMARY OF REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
Schedule III (Continued)
Notes: /(a)/ At December 31, 1998, WRIT was obligated under the following mortgage encumbrances: $13,700,000 on the Ashby, $8,679,000 on Avondale, $7,755,000 on Country Club Towers, $7,178,000 on Frederick County Square, $10,560,000 on Munson Hill Towers, $9,625,000 on Park Adams, $8,360,000 on Roosevelt Towers, $9,056,000 on Woodburn Medical Park I and $12,136,000 on Woodburn Medical Park II. /(b)/ The purchase of real estate investments has been divided between land and buildings and improvements on the basis of management determination of the relative values. /(c)/ The site of Munson Hill Towers is rented under a ground lease requiring annual payments of $22,600 until the expiration of the lease in 2060. /(d)/ At December 31, 1999, total land, buildings and improvements are carried at 667,000,000 for federal income tax purposes. /(e)/ The useful life shown is for the main structure. Buildings and improvements are depreciated over various useful lives ranging from 3 to 50 years. /(f)/ Residential properties are presented in gross square feet. /(g)/ Property was sold subsequent to December 31, 1999.
Schedule III (Continued)
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
SUMMARY OF REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION (IN THOUSANDS)
The following is a reconciliation of real estate assets and accumulated depreciation for the years ended December 31, 1999, 1998, and 1997:
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION: QUARTERLY FINANCIAL RESULTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
* Includes gain on the sale of real estate of $.22 per share in the fourth quarter of 1999 and $.16 and $.02 per share in the first and fourth quarters of 1998, respectively.
/1/ Net income per share does not sum to the total net income per share for the year-ended December 31, 1999 due to rounding differences.