-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wm3Qe2hCfSI1ynIdaaYYw93or/47sJgNZnxVDDw5/QmC3HJEtQ8SMhQHJJlWXxC4 twYfD2K5UJRyh4fi2MNMkQ== 0000926861-98-000013.txt : 19980817 0000926861-98-000013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000926861-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST WASHINGTON REALTY TRUST INC CENTRAL INDEX KEY: 0000926861 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 521879972 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25230 FILM NUMBER: 98688678 BUSINESS ADDRESS: STREET 1: 4350 EAST WEST HWY - STE 400 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019077800 MAIL ADDRESS: STREET 1: 4350 EAST WEST HIGHWAY SUITE 400 STREET 2: 4350 EAST WEST HIGHWAY SUITE 400 CITY: BETHESDA STATE: MD ZIP: 20814 10-Q 1 2ND QUARTER 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1998 Commission File Number 0-25230 FIRST WASHINGTON REALTY TRUST, INC. (Exact name of registrant as specified in its charter) Maryland 52-1879972 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification no.) 4350 East-West Highway, Suite 400, Bethesda, MD 20814 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (301) 907-7800 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock, $.01 par value, outstanding as of August 13, 1998: 8,556,985 Shares of Common Stock FIRST WASHINGTON REALTY TRUST, INC. FORM 10-Q INDEX Part I: Financial Information Page Item 1. Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 1 Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 1998 and 1997 2 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1998 and 1997 3 Notes to Unaudited Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: Other Information Item 2. Market for the Registrant's Common Equity and Related Shareholders Matters 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands except share data) ----------- June 30, December 31, 1998 1997 --------- ------------ (unaudited) ASSETS Rental properties: Land $ 99,719 $ 89,042 Buildings and improvements 407,635 367,756 -------- -------- 507,354 456,798 Accumulated depreciation (44,626) (40,839) --------- --------- Rental properties, net 462,728 415,959 Cash and equivalents 5,187 3,142 Tenant receivables, net 7,576 7,274 Deferred financing costs, net 2,519 2,734 Other assets 10,081 10,032 ----------- ----------- Total assets $488,091 $439,141 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable $243,426 $212,030 Debentures 25,000 25,000 Accounts payable and accrued expenses 9,014 10,914 ----------- ----------- Total liabilities 277,440 247,944 Minority interest 50,478 38,255 Stockholders' equity: Convertible preferred stock $.01 par value, 3,800,000 shares designated; 2,314,189 issued and outstanding (aggregate liquidation preference of $57,855) 23 23 Common stock $.01 par value, 90,000,000 shares authorized; 7,405,179 and 7,291,732 shares issued and outstanding, respectively 74 72 Additional paid-in capital 189,472 179,356 Accumulated distributions in excess of earnings (29,396) (26,509) ---------- ----------- Total stockholders' equity 160,173 152,942 -------- ---------- Total liabilities and stockholders' equity $488,091 $439,141 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 1 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) ------- For three For six months ended months ended June 30, June 30, ---------------- ---------------- 1998 1997 1998 1997 ------- ------- ------- ------- Revenues: Minimum rents $14,054 $10,275 $26,982 $19,907 Tenant reimbursements 3,399 2,108 6,487 4,231 Percentage rents 359 245 755 573 Other income 300 260 528 536 ------- ------- ------ ------ Total revenues 18,112 12,888 34,752 25,247 ------- ------- ------ ----- Expenses: Property operating and maintenance 4,441 2,913 8,584 5,967 General and administrative 1,015 1,282 1,852 2,140 Interest 5,120 4,556 9,971 8,928 Depreciation and amortization 3,656 2,656 6,921 5,117 ------- ------- ------ ------ Total expenses 14,232 11,407 27,328 22,152 ------- ------- ------ ------ Income before gain on sale of properties, income from Management Company, extraordinary item, minority interest and distributions to Preferred Stockholders 3,880 1,481 7,424 3,095 Gain on sale of properties 0 0 1,683 45 Income from Management Company 60 136 340 299 ------- ----- ------ ----- Income before extraordinary item, minority interest and distributions to Preferred Stockholders 3,940 1,617 9,447 3,439 Extraordinary item - loss on early extinguishment of debt 0 0 (358) (134) ------- ------- ------ ------- Income before minority interest and distributions to Preferred Stockholders 3,940 1,617 9,089 3,305 Income allocated to minority interest (887) (242) (1,953) (499) ------- ------- ------ ------- Income before distributions to Preferred Stockholders 3,053 1,375 7,136 2,806 Distributions to Preferred Stockholders (1,410) (1,410) (2,820) (2,820) ------- ------- ------- ------- Income (loss) allocated to Common Stockholders $1,643 ($35) $4,316 ($14) ======= ======= ======= ======= Earnings (loss) per Common Share - Basic Income (loss) before extraordinary item $0.22 ($0.01) $0.63 $0.03 Extraordinary item 0.00 0.00 (0.05) (0.03) ------- ------- ------- ------- Net income (loss) $0.22 ($0.01) $0.58 $0.00 ======= ======= ======= ======= Earnings per Common Share - Diluted Income (loss) before extraordinary item $0.22 ($0.01) $0.63 $0.03 Extraordinary item 0.00 0.00 (0.05) (0.03) ------- ------- ------- ------- Net income (loss) $0.22 ($0.01) $0.5 $0.00 ======= ======= ======= ======= Shares of Common Stock, - Basic 7,405 4,989 7,395 4,968 ======= ======= ======= ======= Shares of Common Stock, - Diluted 7,488 5,058 7,486 5,028 ======= ======= ======= ======= Distributions per share $0.4875 $0.4875 $0.9750 $0.9750 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 2 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited) -------- For the six months ended June 30, ------------------------ 1998 1997 ---------- ---------- Operating Activities: Income before distributions to Preferred Stockholders $7,136 $2,806 Adjustment to reconcile net cash provided by operating activities: Income allocated to minority interest 1,953 499 Depreciation and amortization 6,921 5,117 Gain of sale of rental properties (1,683) (45) Loss on early extinguishment of debt 358 134 Amortization of deferred financing costs and loan premiums (273) 902 Equity in earnings of Management Company (100) (59) Compensation paid or payable in company stock 655 1,400 Provision for uncollectible accounts 921 759 Recognition of deferred rent (404) (621) Net changes in: Tenant receivables (818) (1,282) Other assets (244) 602 Account payable and accrued expenses (628) 149 ---------- ---------- Net cash provided by operating activities 13,794 10,361 --------- -------- Investing Activities: Additions to rental properties (2,119) (4,841) Acquisition of rental properties (21,968) (16,751) Proceeds from sale of rental properties 4,253 1,172 --------- --------- Net cash used in investing activities (19,834) (20,420) -------- -------- Financing Activities: Net proceeds from line of credit 22,637 18,100 Proceeds from mortgage notes 318 2,235 Proceeds from issuance of common stock - 2,000 Proceeds from exercise of stock options 37 - Repayment on mortgage notes (1,670) (11,918) Additions to deferred financing costs (672) (525) Distributions paid to Preferred Stockholders (2,820) (2,820) Distributions paid to Common Stockholders (7,203) (4,823) Distributions paid to minority interest (2,542) (1,320) -------- --------- Net cash provided by financing activities 8,085 929 --------- --------- Net increase (decrease) in cash and equivalents 2,045 (9,130) Cash and equivalents, beginning of period 3,142 11,780 --------- -------- Cash and equivalents, end of period $5,187 $2,650 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- 1. Business General ------- First Washington Realty Trust, Inc. (the "Company") is a fully integrated real estate organization with expertise in acquisitions, property management, leasing, renovation and development of principally supermarket- anchored neighborhood shopping centers. The Company owns a portfolio of 52 retail properties containing a total of approximately 5.6 million square feet of gross leasable area located in the Mid-Atlantic region and the Chicago metropolitan area. The Company, incorporated in Maryland in April 1994, is self-managed and self-administered and has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). The Company currently owns approximately 77.1% of the partnership interests in First Washington Realty Limited Partnership (the "Operating Partnership"). All of the Company's operations are conducted through the Operating Partnership. The Operating Partnership owns 34 Properties directly and 18 Properties are owned by lower tier partnerships or limited liability companies in which the Operating Partnership owns a 99% partnership interest and the Company (or a wholly-owned subsidiary of the Company) owns a 1% partnership interest. Due to the Company's ability, as the general partner, to exercise both financial and operational control over the Operating Partnership, the Operating Partnership is consolidated for financial reporting purposes. Allocation of net income to the limited partners of the Operating Partnership is based on their respective partnership interests and is reflected in the accompanying Consolidated Financial Statements as minority interests. Losses allocable to the limited partners in excess of their basis are allocated to the Common Stockholders as the limited partners have no requirement to fund losses. The Operating Partnership also owns 100% of the non-voting preferred stock of First Washington Management, Inc. ("FWM") and is entitled to 99% of the cash flow from FWM. FWM provides management, leasing and related services for the Properties and to third-party clients, including individual, institutional and corporate property owners. FWM is also referred to herein as the "Management Company". 2. Summary of Significant Accounting Policies Basis of Presentation --------------------- The unaudited interim consolidated financial statements of the Company are prepared pursuant to the Securities and Exchange Commission's rules and regulations for reporting on Form 10-Q and should be read in conjunction with the financial statements and the notes thereto of the Company's 1997 Annual Report to Stockholders. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for fair presentation of the consolidated financial statements for the interim periods have been included. The current period's results of operations are not necessarily indicative of results which ultimately may be achieved for the year. 4 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- The consolidated financial statements include the accounts of the Company and its majority owned partnerships, including the Operating Partnership. All significant intercompany balances and transactions have been eliminated. Income per Share ---------------- Basic and diluted income per share is calculated by dividing income after minority interest, less preferred distributions by the weighted average number of common shares outstanding during the periods presented. Recent Accounting Pronouncements -------------------------------- On March 19, 1998, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus opinion on issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" which requires that the internal costs of preacquisition activities incurred in connection with the acquisition of an operating property be expensed as incurred. The Company has historically capitalized internal preacqusition costs of operating properties as a component of the acquisition price. The Company capitalized $227 for the period January 1 through March 19, 1998 and $123 for the six months ended June 30, 1997. The Company will realize an increase in general and administrative expense due to the adoption of this ruling which is effective immediately. On May 21, 1998, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus opinion on Issue No. 98-9, "Accounting for Contingent Rent In Interim Financial Periods" which provides that recognition of rental income in interim periods must be deferred until the specified target that triggers the contingent rental income is achieved. The Company has historically recognized rental income based on a percentage of tenant sales ratably over the course of the year. This consensus is effective May 21, 1998 and will require the Company to defer recognition of this income until the date that the tenant's sales exceed the breakpoint set forth in the lease agreement. The Company believes the impact of this consensus will be to decrease percentage rentals in the fiscal year ending December 31, 1998 by approximately $240. Additionally, the amount of percentage rentals recognized in each quarter of subsequent fiscal years will differ from historical experience, with a significant concentration of revenue being recognized in the fourth quarter. During the second quarter, the Financial Accounting Standards Board issued SFAS 133 "Accounting for Derivative Instruments and Hedging Activities", which will be effective for the Company's fiscal year 2000. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company is currently assessing the impact of this new statement on its consolidated financial position, liquidity, and results of operations. The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January 1, 1998. The Company has no items of other comprehensive income. 3. Acquisition of Rental Properties During the first six months of 1998, the Company acquired five shopping centers for an aggregate acquisition cost of approximately $57,363. All the acquisitions were accounted for using the purchase method of accounting and the operations of each property is included in the Company's Statement of Operations from their respective dates of acquisition. The following is a summary of the acquisitions: 5 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- Date Total Anchor Anchor Acquired Property Name Location GLA Cost Tenant (GLA) - -------------------------------------------------------------------------------- 1/98 Bowie Plaza Bowie, MD 104,836 $12,135 Giant Food 21,750 3/98 Watkins Park Mitchellville, Plaza MD 112,143 14,662 Safeway 43,205 4/98 Parkville Shopping Center Baltimore, MD 140,925 8,388 A&P Superfresh 39,571 5/98 Elkridge Corners Elkridge, MD 73,529 8,873 A&P Superfresh 18,750 6/98 Village Ukrop's Shopping Center Richmond, VA 110,885 13,305 Supermarket 39,003 ------- ------- ------- 542,318 $57,363 162,279 ======= ======= =======
The acquisitions were financed as follows: Number of Assumed Line of Property Partnerships Market Mortgage Credit Name Units Value Debt (1) Draw Cash Total - ------------------------------------------------------------------------------- Bowie Plaza 130,626 $3,592 $5,374 $3,000 $ 169 $12,135 Watkins Park Plaza - - - 10,000 4,662 (2) 14,662 Parkville Shopping Center 185,361 4,819 3,182 - 387 8,388 Elkridge Corners 89,109 2,228 6,645 - - 8,873 Village Shopping Center 373,162 9,702 - 3,500 103 13,305 ------- ------- ------- ------- ------- ------- 778,258 $20,341 $15,201 $16,500 $5,321 $57,363 ======= ======= ======= ====== ====== =======
(1) Includes loan premiums. (2) Includes net proceeds from the sale of properties of approximately $4,253. The following unaudited pro forma condensed combined results of operations are presented as if the acquisitions of the rental properties occurred on January 1 of the period presented. In preparing the pro forma data, adjustments have been made to assume that the September 1997 Offering occurred on January 1, 1997. The proforma statements are provided for information purposes only. They are based on historical information and do not necessarily reflect the actual results that would have occurred nor are they necessarily indicative of future results of operations of the Company. For the six months ended June 30, -------------------------- 1998 1997 -------- -------- Total Revenues $35,862 $35,232 ======= ======= Pro forma net income before gain on sale of properties and extraordinary item $3,706 $2,888 Gain on sale or properties 0 1,728 Extraordinary item (121) (1,191) ----- ------- Pro forma net income $3,585 $3,425 ====== ====== Pro forma earnings per Common Share - Basic Income before gain on sale of properties and extraordinary item $0.50 $0.41 Gain on sale of properties $0.00 $0.25 Extraordinary item (0.02) (0.17) ------ ------ Net income $0.48 $0.49 ===== ===== Pro forma earnings per Common Share - Diluted Income before gain on sale of properties and extraordinary item $0.50 $0.41 Gain on sale of properties $0.00 $0.24 Extraordinary item (0.02) (0.17) ------ ------ Net income $0.48 $0.48 ===== =====
6 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- 4. Sale of Properties In March 1998, the Company sold its two multi-family properties (Branchwood and Park Place Apartments) for a combined sales price of approximately $8,050. The gain on sale is approximately $1,536 and net proceeds after the payment of the existing mortgage debt was approximately $3,962. In March 1998, the Company sold one of the Georgetown retail shops consisting of 5,000 square feet for $750. The gain on sale is approximately $147 and net proceeds after the payment of existing mortgage debt was approximately $291. The proceeds of these sales were used to purchase Watkins Park Plaza in a like-kind exchange as defined in Internal Revenue Code Section 1031. 5. Line of Credit In January 1998, the Company closed on a $35,500 collateralized revolving Line of Credit with Union Bank of Switzerland. This line is collateralized by six properties (Kenhorst Plaza, Shoppes of Graylyn, Four Mile Fork, Takoma Park, Centre Ridge Marketplace and Newtown Square). The line which matures on January 31, 2001 replaces the Lines of Credit the Company had with Mellon Bank and Corestates Bank. Loans under this line will bear interest at LIBOR plus one percent (1%). The line was subsequently increased to $45,000 on March 20, 1998 and Watkins Park Plaza was pledged as additional collateral. 6. Summary of Noncash Investing and Financing Activities Significant noncash transactions for the six months ended June 30, 1998 and 1997 were as follows: 1998 1997 ---- ---- Liabilities assumed in acquisition of rental properties $15,201 $16,843 Common units in the Operating Partnership issued in connection with the acquisition of rental properties $20,341 $4,660 Preferred units in the Operating Partnership issued in connection with the acquisition of rental properties - $277 Increase in minority interest's ownership of the Operating Partnership $12,813 $1,258 Accrued compensation paid through the issuance of Common Stock $760 -
7. Stock Option Plans On May 8, 1998, the Stockholders approved an amendment to the Company's 1994 Stock Option Plan. The amendment increases the number of shares available for issuance under the Stock Option Plan from 796,691 to 1,296,691 shares. On May 8, 1998, the Stockholders approved an amendment to the Company's 1996 Restricted Stock Plan. The Amendment increases the number of shares available for issuance under the Restricted Stock Plan from 18,508 to 368,508 shares. On May 8, 1998, the Stockholders approved an amendment to the Company's 1996 Contingent Stock Agreements. The amendment further grants an additional 150,000 shares of Common Stock to senior management under a performance-based incentive plan. 7 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- 8. Subsequent Events In July 1998, the Company completed a public offering of 1,150,000 shares of Common Stock (the "July 1998 Offering"). The shares of stock were priced at $23.75, resulting in net proceeds of approximately $25,600 after deducting the underwriter's discount and offering expenses of approximately $1,700. The proceeds of the offering were used to pay down the Company's Line of Credit. On July 17, 1998, the Board of Directors declared a distribution of $0.4875 and $0.6094 per share of Common Stock and Preferred Stock, respectively to shareholders of record as of August 1, 1998, payable on August 15, 1998. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Overview The following discussion should be read in conjunction with the "Selected Consolidated Financial Information" and the Financial Statements and notes thereto of the Company appearing elsewhere in this Form 10-Q. Dollars are in thousands except per share data. Comparison of the three months ended June 30, 1998 to the three months ended June 30, 1997 For the three months ended June 30, 1998, the net income allocated to common stockholders increased by $1,678 from a net loss of ($35) to a net income of $1,643, when compared to the three months ended June 30, 1997, primarily due to an increase in revenues offset by an increase in expenses, and an increase in the amount of income allocated to minority interests. Total revenues increased by $5,224 or 40.5%, from $12,888 to $18,112, due primarily to an increase in minimum rents of $3,779 and tenant reimbursements of $1,291. The increases were primarily due to the purchase of the six Chicago properties purchased in September 1997, Mitchellville Plaza in October 1997, Spring Valley Center in December 1997 (the "1997 Acquisitions"), Bowie Plaza in January 1998, Watkins Park Plaza in March 1998, Parkville Shopping Center in April 1998, Elkridge Corners Shopping Center in May 1998, and Village Shopping Center in June 1998 (the "1998 Acquisitions"). Property operating and maintenance expense increased by $1,528, or 52.5%, from $2,913 to $4,441, due primarily to the 1997 Acquisitions and the 1998 Acquisitions. General and administrative expenses decreased by $267 or 20.8%, from $1,282 to $1,015 due primarily to a decrease in the amount of compensation paid or payable in Company stock of $682, offset by an increase in internal preacquisition costs of $176, cash bonuses of $100 and other cash expenses of $139. Prior to March 19, 1998, internal preacquisition costs were capitalized and included in the cost of acquiring rental properties. Interest expense increased by $564, or 12.4%, from $4,556 to $5,120, due primarily to the increased mortgage indebtedness associated with the 1997 Acquisitions and the 1998 Acquisitions offset by a reduction of mortgage debt through proceeds from the September 1997 offering and a decrease in the weighted average interest rate. The average debt outstanding increased from $216.6 million for 1997 to $260.1 million for 1998 and the weighted average interest rate decreased from 8.4% to 7.9%. Depreciation and amortization expenses increased by $1,000, or 37.7%, from $2,656 to $3,656, primarily due to the 1997 Acquisitions and the 1998 Acquisitions. Income allocated to minority interests increased by $645 from $242 to $887 due to an increase in net income and an increase in the minority interests' ownership of the Operating Partnership from 15.0% to 22.9%. Comparison of the six months ended June 30, 1998 to the six months ended June 30, 1997 For the six months ended June 30, 1998, the net income allocated to common stockholders increased by $4,330 from a net loss of $14 to a net income of $4,316, when compared to the six months ended June 30, 1997, primarily due to an increase in revenues off set by an increase in expenses and an increase in the amount of income allocated to minority interests. 9 Total revenues increased by $9,505 or 37.6%, from $25,247 to $34,752, due primarily to an increase in minimum rents of $7,075 and tenant reimbursements of $2,256. The increases were primarily due to the purchase of Ashburn Farm Village Shopping Center in March 1997, the six Chicago properties purchased in September 1997, Mitchellville Plaza in October 1997, Spring Valley Center in December 1997 (the "1997 Acquisitions"), Bowie Plaza in January 1998, Watkins Park Plaza in March 1998, Parkville Shopping Center in April 1998, Elkridge Corners Shopping Center in May 1998, and Village Shopping Center in June 1998 (the "1998 Acquisitions"). Property operating and maintenance expense increased by $2,617, or 43.9%, from $5,967 to $8,584, due primarily to the 1997 and 1998 Acquisitions. General and administrative expenses decreased by $288 or 13.5%, from $2,140 to $1,852 due primarily to an decrease in the amount of compensation paid or payable in Company stock of $900 offset by an increase in internal preacquisition costs of $176, cash bonuses of $200 and other cash expenses of $236. Prior to March 19, 1998, internal preacquisition costs were capitalized and included in the cost of acquiring rental properties. Interest expense increased by $1,043, or 11.7%, from $8,928 to $9,971, due primarily to the increased mortgage indebtedness associated with the 1997 and 1998 Acquisitions offset by a reduction in mortgage debt from the proceeds of the September 1997 offering and a reduction in the weighted average interest rate. The average debt outstanding increased from $210.3 million for 1997 to $252.3 million for 1998, and the weighted average interest rate decreased from 8.5% to 7.9%. Depreciation and amortization expenses increased by $1,804, or 35.3%, from $5,117 to $6,921, primarily due to the 1997 and 1998 Acquisitions. During 1998, a gain on sale of properties of $1,683 was realized and there was a $358 extraordinary loss due to the early extinguishment of debt. For the same period in 1997, a gain on sale of properties of $45 was realized and there was a $134 extraordinary loss due to the early extinguishment of debt. In 1998, the Company sold its two multi-family properties (Branchwood and Park Place) and one of the Georgetown retail shops retiring $4,236 of mortgage debt associated with these properties. In 1997, the Company sold Thieves Market in which $734 of mortgage debt associated with the property was retired. Income allocated to minority interests increased by $1,454 from $499 to $1,953 due to an increase in net income and an increase in the minority interests ownership of the Operating Partnership from 15.1% to 22.9%. Liquidity and Capital Resources Indebtedness As of June 30, 1998, the Company had total indebtedness of approximately $268.4 million (including $25.0 million of debentures and approximately $243.4 million of mortgage indebtedness). The mortgage indebtedness consists of approximately $236.5 million in indebtedness collateralized by 35 of the Properties and tax-exempt bond financing obligations issued by the Philadelphia Authority for Industrial Development (the "Bond Obligations") of approximately $6.9 million collateralized by one of the properties. Of the Company's indebtedness, $39.5 million (14.7%) is variable rate indebtedness, and $228.9 million (85.3%) is at a fixed rate. The effective interest rates of the indebtedness range from 6.3% to 9.8%, with a weighted average interest rate of 7.9%, and will mature between 1999 and 2014. A large portion of the Company's indebtedness will become due by 2000, requiring balloon payments of $88.9 million in 1999, and $24.4 million in 2000. From 1999 through 2014, the Company will have to refinance an aggregate of approximately $228.5 million. Since the Company anticipates that only a small portion of the principal of such indebtedness will be repaid prior to maturity and the Company will likely not have sufficient funds on hand to repay such indebtedness, the Company will need to refinance such indebtedness through modification or extension of existing indebtedness, additional debt financing or through an additional offering of equity securities. The Company currently has two collateralized revolving lines of credit (the "Lines of Credit") totaling 10 approximately $51 million. In January 1998, the Company closed on $35,500 collateralized revolving Line of Credit with Union Bank of Switzerland. This line is collateralized by six properties (Kenhorst Plaza, Shoppes of Graylyn, Four Mile Fork, Takoma Park, Centre Ridge Marketplace and Newtown Square). The line which matures on January 31, 2001 replaces the Lines of Credit the Company had with Mellon Bank and Corestates Bank. Loans under this line will bear interest at LIBOR plus one percent (1%). The line was subsequently increased to $45,000 on March 20, 1998 and Watkins Park Plaza was pledged as additional collateral. The Company has a collateralized revolving line of credit of up to $5.8 million from First Union Bank. Loans under the line of credit bear interest at LIBOR plus two percent (2%) per annum, and mature on June 30, 1998. Loans under the line of credit are collateralized by a first mortgage lien on Brafferton Shopping Center. As of June 30, 1998, there was $25,937 outstanding under the Lines of Credit which is reflected as mortgage notes payable and included in the discussion of mortgage indebtedness above. Liquidity The Company expects to meet its short-term liquidity requirements generally through its working capital, net cash provided by operations and draws on the Lines of Credit. The Company believes that the foregoing sources of liquidity will be sufficient to fund liquidity needs through 1999. The Company expects to meet certain long-term liquidity requirements such as development, property acquisitions, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements through long-term secured and unsecured indebtedness, including the Lines of Credit and the issuance of additional equity securities. The Company also expects to use funds available under the Lines of Credit to fund acquisitions, development activities and capital improvements on an interim basis. During 1999, $88.9 million of the Company's indebtedness becomes due, including the $25.0 million Exchangeable Debentures. The Company believes that it will be able to retire this debt through either a refinancing of the debt using the properties as collateral, an equity offering or a combination of both. The Company currently believes that the loan-to-values on the properties are at a level that will enable the Company to refinance the loans without an additional requirement for capital. The Company has elected to qualify as a REIT for federal income tax purposes commencing with its tax year ended December 31, 1994. To qualify as a REIT, the Company is required, among other items, to pay distributions to its shareholders of at least 95% of its taxable income. The Company intends to make quarterly distributions to its shareholders from operating cash flow. New Accounting Standards On March 19, 1998, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus opinion on issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" which requires that the internal costs of preacquisition activities incurred in connection with the acquisition of an operating property be expensed as incurred. The Company has historically capitalized internal preacqusition costs of operating properties as a component of the acquisition price. The Company capitalized $227 for the period January 1 through March 19, 1998 and $123 for the six months ended June 30, 1997. The Company will realize an increase in general and administrative expense due to the adoption of this ruling which is effective immediately. On May 21, 1998, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus opinion on Issue No. 98-9, "Accounting for Contingent Rent In Interim Financial Periods" which provides that recognition of rental income in interim periods must be deferred until the specified target that triggers the contingent rental income is achieved. The Company has historically recognized rental income based on a percentage of tenant sales ratably over the course of the year. This consensus is effective May 21, 1998 and will require the Company to defer recognition of this income until the date that the tenant's sales exceed the breakpoint set forth in the lease agreement. The Company believes the impact of this consensus will be to decrease percentage rentals in the fiscal year ending December 31, 1998 by approximately $240. Additionally, the amount of percentage rentals recognized in each quarter of subsequent fiscal years will differ from historical experience, with a significant concentration of revenue being recognized in the fourth quarter. 11 During the second quarter, the Financial Accounting Standards Board issued SFAS 133 "Accounting for Derivative Instruments and Hedging Activities", which will be effective for the Company's fiscal year 2000. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company is currently assessing the impact of this new statement on its consolidated financial position, liquidity, and results of operations. The Company has considered the effects that the year 2000 may have on its computer hardware and software application. The Company does not believe that there will be a material effect on the Company's operations or future financial results. 12 Part II OTHER INFORMATION Item 2. Recent Sales of Unregistered Equity Securities (a) Securities Sold The following table sets forth the date of sale, title and amount of unregistered securities sold by the Company since December 31, 1997: Date of Sale Title Amount 01/01/98 Common Units 130,626 04/30/98 Common Units 185,361 05/28/98 Common Units 89,109 06/01/98 Common Units 373,162
(b) Underwriters and other purchasers i. January 1, 1998 Sales. Underwriters were not retained in connection with the sale of these securities. These units were sold to the seller of Bowie Plaza, an "accredited investor". ii. April 30, 1998 Sales. Underwriters were not retained in connection with the sale of these securities. These units were sold to the seller of Parkville Shopping Center, an "accredited investor". iii. May 28, 1998 Sales. Underwriters were not retained in connection with the sale of these securities. These units were sold to the seller of Elkridge Corners, an "accredited investor". iv. June 1, 1998 Sales. Underwriters were not retained in connection with the sale of these securities. These units were sold to the seller of Village Shopping Center, an "accredited investor". (c) Consideration i. January 1, 1998 Sales. These units were issued in exchange for property having a value of approximately $6.8 million, net of assumed indebtedness. There were no underwriting discounts or commissions with respect to such securities. ii. April 30, 1998 Sales. These units were issued in exchange for property having a value of approximately $5.2 million, net of assumed indebtedness. There were no underwriting discounts or commissions with respect to such securities. iii. May 28, 1998 Sales. These units were issued in exchange for property having a value of approximately $2.2 million, net of assumed indebtedness. There were no underwriting discounts or commissions with respect to such securities. iv. June 1, 1998 Sales. These units were issued in exchange for property having a value of approximately $9.8 million, net of assumed indebtedness. There were no underwriting discounts or commissions with respect to such securities. 13 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (1) - ----------------------------------------------------------------------- (1) Filed herewith. (b) Reports on Form 8-K. An interim report on Form 8-K was filed on May 18, 1998 including certain exhibits thereto. An interim report on Form 8-K was filed on June 17, 1998 reporting the acquisition of five retail properties. An interim report on Form 8-K was filed on July 28, 1998 regarding recently enacted legislation. An interim report on Form 8-K was filed on July 31, 1998 including certain exhibits thereto. 14 SIGNATURES Pursuant to the requirements 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. FIRST WASHINGTON REALTY TRUST, INC. Date: August 13, 1998 /s/ William J. Wolfe ------------------------------ By: William J. Wolfe President and Chief Executive Officer Date: August 13, 1998 /s/ James G. Blumenthal --------------------------------- By: James G. Blumenthal Executive Vice President and Chief Financial Officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-mos DEC-31-1998 JUN-30-1998 5,187 0 7,576 0 0 0 507,354 44,626 488,091 0 243,426 0 23 74 189,472 488,091 0 34,752 0 17,357 0 0 9,971 0 0 4,674 0 (358) 0 4,316 .58 .58
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