Elme Communities - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

 

 

 

MARYLAND		53-0261100
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

 

6110 Executive Boulevard, Rockville, Maryland		20852
(Address of principal executive office)		(Zip code)

 

 

 

 

 

 

SHARES OF BENEFICIAL INTEREST 39,146,220

 

 

 

WASHINGTON REAL ESTATE INVESTMENT TRUST

 

INDEX

 

						Page
Part I:		Financial Information
		Item l.		Financial Statements
				Consolidated Balance Sheets		3
				Consolidated Statements of Income		4
				Consolidated Statement of Changes in Shareholders’ Equity		5
				Consolidated Statements of Cash Flows		6
				Notes to Financial Statements		7
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
		Item 3.		Qualitative and Quantitative Disclosures about Financial Market Risk		23
		Item 4.		Controls and Procedures		24
Part II:		Other Information
		Item l.		Legal Proceedings		25
		Item 2.		Changes in Securities		25
		Item 3.		Defaults upon Senior Securities		25
		Item 4.		Submission of Matters to a Vote of Security Holders		25
		Item 5.		Other Information		25
		Item 6.		Exhibits and Reports on Form 8-K		25
Signatures						27

 

Part I

 

FINANCIAL INFORMATION

 

The information furnished in the accompanying Consolidated Balance Sheets, Statements of Income, Statements of Cash Flows and Statement of Changes in Shareholders’ Equity reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2001 included in the Trust’s 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

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WASHINGTON REAL ESTATE INVESTMENT TRUST

 

CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share amounts)

(Unaudited)

 

		September 30, 2002				December 31, 2001
Assets
Land		$	169,045			$	151,782
Building			679,365				622,804
Total real estate, at cost		$	848,410				774,586
Accumulated depreciation			(139,965	)			(122,625	)
Total investment in real estate			708,445				651,961
Cash and cash equivalents			15,818				26,441
Rents and other receivables, net of allowance for doubtful accounts of $2,400 and $1,993, respectively			12,617				10,523
Prepaid expenses and other assets			21,083				19,010
		$	757,963			$	707,935
Liabilities
Accounts payable and other liabilities			11,869				13,239
Advance rents			4,172				3,604
Tenant security deposits			6,442				6,148
Mortgage notes payable			87,197				94,726
Line of credit payable			53,750				—
Notes payable			265,000				265,000
			428,430				382,717
Minority interest			1,554				1,611
Shareholders' Equity
Shares of beneficial interest; $.01 par value; 100,000 shares authorized: 39,146 and 38,829 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively			391				388
Additional paid-in capital			328,387				323,257
Retained earnings (deficit)			(799	)			(38	)
Total Shareholders' Equity			327,979				323,607
Total Liabilities and Shareholders' Equity		$	757,963			$	707,935

 

See accompanying notes to financial statements

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WASHINGTON REAL ESTATE INVESTMENT TRUST

 

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2002				2001				2002				2001
Revenue
Real estate rental revenue		$	38,324			$	37,510			$	113,903			$	109,528
Other income			177				302				552				1,251
			38,501				37,812				114,455				110,779
Expenses
Real estate expenses			(11,453	)			(10,732	)			(32,779	)			(31,475	)
Interest expense			(7,068	)			(6,731	)			(20,838	)			(20,178	)
Depreciation and amortization			(7,303	)			(6,777	)			(21,305	)			(19,624	)
General and administrative			(1,034	)			(1,303	)			(3,505	)			(4,541	)
			(26,858	)			(25,543	)			(78,427	)			(75,818	)
Income from continuing operations			11,643				12,269				36,028				34,961
Discontinued operations:
Income (loss) from operations of property disposed			—				259				(82	)			690
Gain on property disposed			—				—				3,838				—
Income before gain on sale of real estate investment			11,643				12,528				39,784				35,651
Gain on sale of real estate investment			—				4,296				—				4,296
Net Income		$	11,643			$	16,824			$	39,784			$	39,947
Per share information based on the weighted average of shares outstanding
Shares—Basic			39,134				38,460				39,030				37,312
Shares—Diluted			39,358				38,795				39,265				37,618
Income from continuing operations - Basic		$	0.30			$	0.32			$	0.92			$	0.94
Income from continuing operations - Diluted		$	0.30			$	0.32			$	0.92			$	0.93
Income (loss) from operations of property disposed - Basic		$	0.00			$	0.01			$	0.00			$	0.02
Income (loss) from operations of property disposed - Diluted		$	0.00			$	0.00			$	0.00			$	0.02
Gain on property disposed - Basic		$	0.00			$	0.00			$	0.10			$	0.00
Gain on property disposed - Diluted		$	0.00			$	0.00			$	0.09			$	0.00
Income before gain on sale of real estate investment - Basic		$	0.30			$	0.33			$	1.02			$	0.96
Income before gain on sale of real estate investment - Diluted		$	0.30			$	0.32			$	1.01			$	0.95
Gain on sale of real estate investment - Basic		$	0.00			$	0.11			$	0.00			$	0.11
Gain on sale of real estate investment - Diluted		$	0.00			$	0.11			$	0.00			$	0.11
Net income per share - Basic		$	0.30			$	0.44			$	1.02			$	1.07
Net income per share - Diluted		$	0.30			$	0.43			$	1.01			$	1.06
Dividends paid		$	0.3525			$	0.3325			$	1.0375			$	0.9775

 

See accompanying notes to financial statements

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WASHINGTON REAL ESTATE INVESTMENT TRUST

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

(In Thousands)

(Unaudited)

 

		Shares		Par Value			Additional Paid in Capital			Retained Earnings (deficit)				Shareholders' Equity
Balance, December 31, 2001		38,829		$	388		$	323,257		$	(38	)		$	323,607
Net income		—			—			—			39,784				39,784
Dividends		—			—			—			(40,545	)			(40,545	)
Share Options Exercised		310			3			4,949			—				4,952
Share Grants		7			—			181			—				181
Balance, September 30, 2002		39,146		$	391		$	328,387		$	(799	)		$	327,979

 

See accompanying notes to financial statements

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WASHINGTON REAL ESTATE INVESTMENT TRUST

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2002				2001
Cash Flow From Operating Activities
Net income		$	39,784			$	39,947
Adjustments to reconcile net income to net cash provided by operating activities
Gain on sale of real estate			(3,838	)			(4,296	)
Depreciation and amortization			21,317				19,694
Bad debt expense			1,024				701
Changes in other assets			(6,955	)			(3,997	)
Changes in other liabilities			(493	)			(695	)
Share Grants			110				154
Net cash provided by operating activities			50,949				51,508
Cash Flow From Investing Activities
Real estate acquisitions			(58,074	)			(46,070	)
Capital improvements to real estate			(19,793	)			(8,794	)
Non-real estate capital improvements			(146	)			(212	)
Cash received for sale of real estate			5,813				8,115
Net cash used in investing activities			(72,200	)			(46,961	)
Cash Flow From Financing Activities
Share Offering			—				53,083
Line of Credit Borrowings			53,750				—
Line of Credit Repayments			—				—
Notes payable			(40,545	)			(36,780	)
Principal payments - Mortgage note payable			(7,529	)			(619	)
Share options exercised			4,952				6,296
Net cash provided by financing activities			10,628				21,980
Net (decrease) increase in cash and cash equivalents			(10,623	)			26,527
Cash and temporary investments at beginning of year			26,441				6,426
Cash and cash equivalents at end of period		$	15,818			$	32,953
Supplemental disclosure of cash flow information:
Cash paid for interest during the nine months ended		$	22,816			$	22,082

 

See accompanying notes to financial statements.

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WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

NOTE 1: NATURE OF BUSINESS

Washington Real Estate Investment Trust (“WRIT”, the “Trust” or the “company”), a Maryland Real Estate Investment 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 of income-producing real estate properties in the greater Washington - Baltimore region. WRIT owns a diversified portfolio of office buildings, industrial/flex centers, multi-family buildings and retail centers.

 

 

WRIT has qualified as a Real Estate Investment Trust (REIT) under Sections 856-860 of the Internal Revenue Code and intends to continue to qualify as such. To maintain its status as a REIT, the company is required to distribute 90% of its ordinary taxable income (95% for years prior to 2001) to its shareholders. The company has the option of (i) reinvesting the sale price of properties sold, allowing for a deferral of income taxes on the sale, (ii) paying out capital gains to the shareholders with no tax to the company or (iii) treating the capital gains as having been distributed to the shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to the shareholders. The company distributed all of its 2001, 2000 and 1999 ordinary taxable income to its shareholders. Gain on sale of properties disposed during 2001, 2000 and 1999 were reinvested in replacement properties, therefore no capital gains were distributed to shareholders during these periods. Accordingly, no provision for income taxes was necessary.

 

NOTE 2: ACCOUNTING POLICIES

 

 

The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although WRIT believes that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in WRIT’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

 

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. WRIT will classify a property as held for sale when the company commits to the disposal of the property and begins to actively pursue the sale of the property.

 

On February 28, 2002, WRIT sold 1501 South Capitol Street, an industrial/flex center in Washington, D.C., for $6.2 million resulting in a gain of $3.8 million. This property provided no real estate revenue in 2002 because it had been vacant since November 2001. The property produced a net loss of $0.1 million for the nine months ended September 30, 2002 and total revenue of $1.0 million and net income of $0.7 million for the nine months ended

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WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

September 30, 2001 and is reflected as a discontinued operation. WRIT recognized no impairment loss on this property prior to or upon sale. As of September 30, 2002, WRIT had no properties held for sale.

 

 

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, “Accounting for Leases”. 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.

 

 

WRIT formed a limited liability company with a member of the entity which previously owned 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 minority owner’s 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 distribution per share for each ownership unit in the limited liability company.

 

 

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 consolidated statements of income.

 

 

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.

 

In accordance with SFAS 144, 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 2001 or the nine months ended September 30, 2002. In accordance with SFAS No. 66, “Accounting for Sales of

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WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

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 include investments readily convertible to known amounts of cash with original maturities of 90 days or less.

 

 

WRIT maintains Stock Option Plans, which include qualified and non-qualified options for eligible employees. Stock options are accounted for in accordance with Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees”, whereby if options are priced at fair market value or above at the date of grant, no compensation expense is recognized.

 

 

WRIT has no items of comprehensive income that would require separate reporting in the accompanying consolidated statements of income.

 

 

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 that could potentially reduce or “dilute” earnings per share, based on the treasury stock method.

 

 

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.

 

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

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WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

NOTE 3: REAL ESTATE INVESTMENTS

WRIT’s real estate investment portfolio, at cost, consists of properties located in Maryland, Washington, D.C. and Virginia as follows:

 

		September 30, 2002
		(in thousands)
Office buildings		$	458,651
Industrial/Flex Centers			138,181
Multi-family Properties			109,465
Retail centers			142,113
		$	848,410

 

WRIT acquired the following properties during 2002:

 

Acquisition Date		Property Name		Property Type		Rentable Square Feet		Purchase Contract Cost (in thousands)
January 25, 2002		1620 Wilson Boulevard		Retail		5,364		$  2,250
June 21, 2002		Centre at Hagerstown		Retail		326,846		$41,700
July 23, 2002		The Atrium Building		Office		81,390		$14,200

 

On February 28, 2002 WRIT sold its 1501 South Capitol Street industrial/flex center in Washington, DC for $6.2 million, resulting in a gain of $3.8 million. The proceeds and resultant gain on sale were reinvested on a tax-free basis in the acquisition of the Centre at Hagerstown.

 

NOTE 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 bore interest at 9.00 percent per annum. On September 4, 2002, WRIT prepaid this $6.7 million unpaid mortgage principal and interest. This mortgage was paid in full without penalty through a draw on the unsecured line of credit facility bearing interest at 2.52 percent per annum (see Note 5).

 

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

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WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

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.

 

On November 1, 2001, WRIT assumed an $8.5 million mortgage note payable with an estimated fair value of $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 recorded at its estimated fair value of $9.3 million resulting in an adjustment to the basis of this property and an effective interest rate of 6.8%.

 

Annual maturities of principal as of September 30, 2002 are as follows:

 

		(in thousands)
2002		$	246
2003			1,030
2004			1,110
2005			26,634
2006			331
Thereafter			57,846
Total		$	87,197

 

WRIT has two unsecured lines of credit in the aggregate amount of $75.0 million, with $53.8 million outstanding under the lines of credit as of September 30, 2002. Amounts outstanding under the lines of credit during the three months ended September 30, 2002 bore interest at 2.52%. This rate was calculated based upon a LIBOR rate of 1.82% increased by a 70 basis point spread. All unpaid interest and principal can be prepaid without penalty prior to the expiration of WRIT’s interest rate lock-in periods. Advances will reprice upon rate expiration if not paid in full by WRIT in accordance with the terms discussed below.

 

The $50.0 million line of credit, renewed on July 25, 2002, requires WRIT to pay the lender unused line of credit fees at the rate of 0.200 percent per annum on the amount by which the unused portion of the line of credit exceeds the balance of outstanding advances and term loans. Advances under this agreement bear interest at either LIBOR plus a spread, the Prime rate plus a spread, or an advance can be converted into a term loan based upon a Treasury rate plus a spread. All outstanding advances are due and payable upon maturity in July 2005.

 

The $25.0 million line of credit, renewed on July 23, 2002, requires WRIT to pay the lender unused line of credit fees based on a sliding scale as usage is increased. These fees are payable quarterly. Advances under this agreement bear interest at either LIBOR plus a spread or the higher of the Prime rate or the Federal Funds effective rate plus a spread based on WRIT’s credit rating on its publicly issued debt. All outstanding advances are due and payable upon maturity in July 2004.

 

The lines of credit contain certain financial and non-financial covenants, all of which WRIT met as of September 30, 2002. The covenants under the lines of credit require WRIT to maintain insurance on its properties in such amounts and covering such risks as are (a) customarily carried by companies engaged in similar businesses or (b)

11

WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

consistent with sound business practices. WRIT renewed its property insurance coverage effective September 1, 2002 resulting in premiums increasing approximately 31% over the prior year policy. The line of credit agreements require WRIT to insure its properties against loss or damage at least equal to their then full insurable value. The renewed policy does not specifically exclude terrorism activities, but 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 acts.

 

On August 13, 1996 WRIT sold $50.0 million of 7.125 percent unsecured 7-year 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 to its properties.

 

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 of approximately $7.2 million will be amortized over the lives of the notes using the effective interest method.

 

On November 6, 2000, WRIT sold $55.0 million of 7.78 percent unsecured notes due November 2004. The notes bear an effective interest rate of 7.89 percent. Total proceeds to the Trust, net of underwriting fees, were $54.8 million. WRIT used the proceeds of these notes to repay advances on its lines of credit.

 

These notes contain certain financial and non-financial covenants, all of which WRIT met as of September 30, 2002. The covenants under the lines of credit require WRIT to maintain insurance on its properties in such amounts and covering such risks as are (a) customarily carried by companies engaged in similar businesses or (b) consistent with sound business practices. WRIT renewed its property insurance coverage effective September 1, 2002 resulting in premiums increasing approximately 31% over the prior year policy. The notes require WRIT to insure its properties against loss or damage at least equal to their then full insurable value. The renewed policy does not specifically exclude terrorism activities, but 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 acts.

 

The Trust adopted a split dollar life insurance plan for senior officers, excluding the Chief Executive Officer (“CEO”), in 2000. It is intended that the Trust will recover its costs from the life insurance policies at death prior to retirement, upon termination prior to retirement or upon retirement at age 65. 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 cash values of the policy in excess of the Trust’s interest can be used by the executive. Annual premiums for the split dollar life insurance plan are due each April. On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Act”) was signed into law. Section 402 of the Act prohibits a public company from making or maintaining a personal loan to any of its directors or executive officers, either directly or indirectly. As of September 30, 2002, the Trust is awaiting definitive guidance from either Congress or the Securities and Exchange Commission (the “SEC”) in determining if its split dollar life insurance executive benefit arrangement will be considered in compliance with the Act.)

 

The Trust adopted a non-qualified deferred compensation plan for the CEO and members of the Board of Trustees in 2000. The plan allows for a deferral of a percentage of annual cash compensation and trustee fees.

12

WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

Compensation deferred will be credited with interest equal to 7.5%. The plan is unfunded and payments are to be made from general assets of the Trust. The deferred compensation liability was $0.7 million at September 30, 2002 including $0.1 million recognized for the nine months ended September 30, 2002.

 

WRIT established a Supplemental Executive Retirement Plan (“SERP”) effective July 1, 2002 for the benefit of the CEO. Upon the CEO’s termination of employment from the Company for any reason other than death, discharge for cause or total and permanent disability, the CEO will be entitled to receive an annual benefit equal to his accrued benefit times his vested interest as outlined in the SERP.

 

WRIT purchased a universal life insurance policy on the CEO’s life to serve as a source of funds to assist WRIT in meeting its liabilities under the SERP. Through an endorsement split dollar arrangement, WRIT has made available to the CEO pre-retirement life insurance coverage through age 70.

 

In the event the CEO continues in the employment of the Company until age 70, the annual benefit to be paid to the CEO shall be $200,000. The SERP is not subject to vesting, funding and fiduciary requirements under ERISA. WRIT recognized $70,000 as the deferred compensation liability and service cost for the SERP for the three months ended September 30, 2002 in accordance with the requirements of SFAS 87.

 

WRIT has four reportable segments: Office Buildings, Industrial/Flex Centers, Multi-family Properties and Retail Centers. For the nine months ended September 30, 2002 Office Buildings, which include medical office buildings, represented 52 percent of real estate rental revenue and provide office space for various professions and businesses. Industrial/Flex Centers represented 14 percent of real estate rental revenue and are used for warehousing, distribution and related offices. Multi-family Properties represented 19 percent of real estate rental revenue and provide housing for families throughout the Washington Metropolitan area. Retail Centers represented the remaining 15 percent of real estate rental revenue and are typically neighborhood grocery store or drug store anchored retail centers.

 

The accounting policies of each of the segments are the same as those described in Note 2. WRIT evaluates performance based upon operating income from the combined properties in each segment. WRIT’s reportable segments are consolidations of similar properties. They are managed separately because each segment requires different operating, pricing and leasing strategies. All of these properties have been acquired separately and are incorporated into the applicable segment.

13

 

WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 20, 2002

(UNAUDITED)

 

		Three Months Ended September 30, 2002
		Office Buildings			Industrial/Flex Centers			Multi-family			Retail Centers			Corporate And Other				Consolidated
		(in thousands)
Revenue
Real estate rental revenue		$	19,484		$	5,240		$	7,205		$	6,395		$	—			$	38,324
Other income			—			—			—			—			177				177
			19,484			5,240			7,205			6,395			177				38,501
Expenses
Real estate expenses			6,385			1,122			2,666			1,280			—				11,453
Interest expense			389			160			1,075			100			5,344				7,068
Depreciation and amortization			3,888			1,210			1,036			883			286				7,303
General and administration			—			—			—			—			1,034				1,034
			10,662			2,492			4,777			2,263			6,664				26,858
Income from continuing operations			8,822			2,748			2,428			4,132			(6,487	)			11,643
Discontinued Operations:
Income (loss) from operations of disposed property			—			—			—			—			—				—
Gain on property disposed			—			—			—			—			—				—
Income before sale of real estate investment			8,822			2,748			2,428			4,132			(6,487	)			11,643
Gain on sale of real estate investment			—			—			—			—			—				—
Net Income		$	8,822		$	2,748		$	2,428		$	4,132		$	(6,487	)		$	11,643
Capital expenditures (including acquisitions)		$	3,964		$	552		$	1,812		$	42,684		$	84			$	49,096
Total assets		$	399,859		$	123,083		$	80,439		$	127,285		$	27,297			$	757,963

 

		Three Months Ended September 30, 2001
		Office Buildings			Industrial/Flex Centers			Multi-family			Retail Centers			Corporate And Other				Consolidated
		(in thousands)
Revenue
Real estate rental revenue		$	21,278		$	4,605		$	7,016		$	4,611		$	—			$	37,510
Other income			—			—			—			—			302				302
			21,278			4,605			7,016			4,611			302				37,812
Expenses
Real estate expenses			6,401			932			2,459			940			—				10,732
Interest expense			398			—			1,078			155			5,100				6,731
Depreciation and amortization			3,939			992			956			580			310				6,777
General and administration			—			—			—			—			1,303				1,303
			10,738			1,924			4,493			1,675			6,713				25,543
Income from continuing operations			10,540			2,681			2,523			2,936			(6,411	)			12,269
Discontinued Operations:
Income (loss) from operations of disposed property			—			259			—			—			—				259
Gain on property disposed			—			—			—			—			—				—
Income before sale of real estate investment			10,540			2,940			2,523			2,936			(6,411	)			12,528
Gain on sale of real estate investment			4,296			—			—			—			—				4,296
Net Income		$	14,836		$	2,940		$	2,523		$	2,936		$	(6,411	)		$	16,824
Capital expenditures (including acquisitions)		$	1,917		$	421		$	766		$	381		$	141			$	3,626
Total assets		$	381,131		$	106,500		$	80,228		$	81,749		$	45,193			$	694,801

 

14

WASHINGTON REAL ESTATE INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

		Nine Months Ended September 30, 2002
		Office Buildings			Industrial/Flex Centers				Multi-family			Retail Centers			Corporate And Other				Consolidated
		(in thousands)
Revenue
Real estate rental revenue		$	59,279		$	16,046			$	21,430		$	17,148		$	—			$	113,903
Other income			—			—				—			—			552				552
			59,279			16,046				21,430			17,148			552				114,455
Expenses
Real estate expenses			18,177			3,543				7,649			3,410			—				32,779
Interest expense			1,173			482				3,227			405			15,551				20,838
Depreciation and amortization			11,582			3,603				3,087			2,147			886				21,305
General and administration			—			—				—			—			3,505				3,505
			30,932			7,628				13,963			5,962			19,942				78,427
Income from continuing operations			28,347			8,418				7,467			11,186			(19,390	)			36,028
Discontinued Operations:
Income (loss) from operations of disposed property			—			(82	)			—			—			—				(82	)
Gain on property disposed			—			3,838				—			—			—				3,838
Income before sale of real estate investment			28,347			12,174				7,467			11,186			(19,390	)			39,784
Gain on sale of real estate investment			—			—				—			—			—				—
Net Income		$	28,347		$	12,174			$	7,467		$	11,186		$	(19,390	)		$	39,784
Capital expenditures (including acquisitions)		$	27,454		$	862			$	3,279		$	46,272		$	146			$	78,013
Total assets		$	399,859		$	123,083			$	80,439		$	127,285		$	27,297			$	757,963

 

		Nine Months Ended September 30, 2002
		Office Buildings			Industrial/Flex Centers			Multi-family			Retail Centers			Corporate And Other				Consolidated
		(in thousands)
Revenue
Real estate rental revenue		$	60,507		$	14,310		$	20,512		$	14,199		$	—			$	109,528
Other income			—			—			—			—			1,251				1,251
			60,507			14,310			20,512			14,199			1,251				110,779
Expenses
Real estate expenses			18,038			3,118			7,309			3,010			—				31,475
Interest expense			1,134			—			3,238			468			15,338				20,178
Depreciation and amortization			11,246			2,989			2,849			1,746			794				19,624
General and administration			—			—			—			—			4,541				4,541
			30,418			6,107			13,396			5,224			20,673				75,818
Income from continuing operations			30,089			8,203			7,116			8,975			(19,422	)			34,961
Discontinued Operations:
Income (loss) from operations of disposed property			—			690			—			—			—				690
Gain on disposal			—			—			—			—			—				—
Income before sale of real estate investment			30,089			8,893			7,116			8,975			(19,422	)			35,651
Gain on sale of real estate investment			4,296			—			—			—			—				4,296
Net Income		$	34,385		$	8,893		$	7,116		$	8,975		$	(19,422	)		$	39,947
Capital expenditures (including acquisitions)		$	49,713		$	1,614		$	2,995		$	542		$	212			$	55,076
Total assets		$	381,131		$	106,500		$	80,228		$	81,749		$	45,193			$	694,801