-----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, M6xSzWYRDn61Lwxfen2m/3Vf5T2jxecRiZdQlaYuc1uQo1ITVeh3Kl4F3N9+JS3o Pz+m81uB+OUAg6yIZ4FKMA== 0000926861-99-000023.txt : 19990816 0000926861-99-000023.hdr.sgml : 19990816 ACCESSION NUMBER: 0000926861-99-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 001-14571 FILM NUMBER: 99687500 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, 1999 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, 1999: 9,404,901 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, 1999 (unaudited) and December 31, 1998 1 Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 1999 and 1998 2 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 and 1998 3 Notes to Unaudited Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Qualitative and Quantitative Disclosures about Risk 13 Part II: Other Information Item 2. Market for the Registrant's Common Equity and Related Shareholders Matters 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands except share data) ----------- June 30, December 31, 1999 1998 -------- ------------ (unaudited) ASSETS Rental properties: Land $111,771 $108,562 Buildings and improvements 462,354 447,584 ------- ------- 574,125 556,146 Accumulated depreciation (59,564) (51,475) ------- ------- Rental properties, net 514,561 504,671 Cash and equivalents 4,045 3,163 Tenant receivables, net 9,385 9,463 Deferred financing costs, net 5,306 1,921 Other assets 10,191 13,736 -------- -------- Total assets $543,488 $532,954 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable $259,115 $244,113 Debentures - 25,000 Accounts payable and accrued expenses 10,690 11,542 -------- -------- Total liabilities 269,805 280,655 Minority interest 65,396 66,218 Commitments and Contingencies Stockholders' equity: Convertible preferred stock $.01 par value, 3,800,000 shares designated; 2,726,349 and 2,314,189 issued and outstanding, respectively (aggregate liquidation preference of $68,159 and $57,855 respectively) 27 23 Common stock $.01 par value, 90,000,000 shares authorized; 9,394,801 and 8,566,985 shares issued and outstanding, respectively 94 86 Additional paid-in capital 243,830 218,345 Accumulated distributions in excess of earnings (35,664) (32,373) ------ ------ Total stockholders' equity 208,287 186,081 ------- ------- Total liabilities and stockholders' equity $543,488 $532,954 ======== ======== 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 months ended For six months ended June 30, June 30, ---------------------- -------------------- 1999 1998 1999 1998 Revenues: Minimum rents $16,445 $14,054 $32,422 $26,982 Tenant reimbursements 4,106 3,399 8,404 6,487 Percentage rents 501 359 881 755 Other income 388 300 858 528 ------- ------- ------ ------- Total revenues 21,440 18,112 42,565 34,752 ------- ------- ------ ------- Expenses: Property operating and maintenance 4,787 4,441 9,993 8,584 General and administrative 1,068 1,015 2,162 1,852 Interest 5,677 5,120 11,202 9,971 Depreciation and amortization 4,282 3,656 8,494 6,921 ------ ------ ------ ------ Total expenses 15,814 14,232 31,851 27,328 ------ ------ ------ ------ Income before gain on sale of properties, income (loss) from Management Company, extraordinary item, minority interest and distributions to Preferred Stockholders 5,626 3,880 10,714 7,424 Gain on sale of properties - - - 1,683 Income (loss) from Management Company (315) 60 (230) 340 ------ ----- ------- ----- Income before extraordinary item, minority interest and distributions to Preferred Stockholders 5,311 3,940 10,484 9,447 Extraordinary item - loss on early extinguishment of debt - - - (358) ----- ----- ------ ------ Income before minority interest and distributions to Preferred Stockholders 5,311 3,940 10,484 9,089 Income allocated to minority interest (1,273) (887) (2,579) (1,953) ------- ------ ------- ------- Income before distributions to Preferred Stockholders 4,038 3,053 7,905 7,136 Distributions to Preferred Stockholders (1,412) (1,410) (2,822) (2,820) ------- ------- ------- ------- Income allocated to Common Stockholders $2,626 $1,643 $5,083 $4,316 ====== ====== ====== ====== Earnings per Common Share - Basic Income before extraordinary item $0.30 $0.22 $0.59 $0.63 Extraordinary item 0.00 0.00 0.00 (0.05) ----- ----- ----- ------ Net income $0.30 $0.22 $0.59 $0.58 ===== ===== ===== ===== Earnings per Common Share - Diluted Income before extraordinary item $0.30 $0.22 $0.58 $0.63 Extraordinary item 0.00 0.00 0.00 (0.05) ----- ----- ----- ------ Net income $0.30 $0.22 $0.58 $0.58 ===== ===== ===== ===== Shares of Common Stock - Basic 8,787 7,405 8,682 7,395 ===== ===== ===== ===== Shares of Common Stock - Diluted 8,875 7,488 8,763 7,486 ===== ===== ===== ===== 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) -------- Six months ended June 30, --------------------------- 1999 1998 ---- ---- Operating Activities: Income before distributions to Preferred Stockholders $7,905 $7,136 Adjustment to reconcile to net cash provided by operating activities: Income allocated to minority interest 2,579 1,953 Depreciation and amortization 8,494 6,921 Gain of sale of rental properties - (1,683) Loss on early extinguishment of debt - 358 Amortization of deferred financing costs and loan premiums (252) (273) Equity in earnings of Management Company 470 (100) Compensation paid or payable in common stock 642 655 Provision for uncollectible accounts 637 921 Recognition of deferred rent (632) (404) Net changes in: Tenant receivables 73 (818) Other assets 858 (244) Accounts payable and accrued expenses (339) (628) ------ ------ Net cash provided by operating activities 20,435 13,794 ------ ------- Investing Activities: Additions to rental properties (2,804) (2,119) Acquisition of rental properties (10,345) (21,968) Proceeds from sale of rental properties - 4,253 -------- -------- Net cash used in investing activities (13,149) (19,834) -------- -------- Financing Activities: Net proceeds from line of credit 19,300 22,637 Net Proceeds from mortgage notes refinancings 18,822 318 Proceeds from exercise of stock options 49 37 Repayment of line of credit (23,200) - Mortgage notes principal payments (2,131) (1,670) Additions to deferred financing costs (3,965) (672) Distributions paid to Preferred Stockholders (2,822) (2,820) Distributions paid to Common Stockholders (8,375) (7,203) Distributions paid to minority interest (4,082) (2,542) ------- ------- Net cash provided by (used in) financing activities (6,404) 8,085 ------- ------- Net change in cash and equivalents 882 2,045 Cash and equivalents, beginning of period 3,163 3,142 ------- ------- Cash and equivalents, end of period $4,045 $5,187 ======= ======= 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 that 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 owns a portfolio of 56 retail properties containing a total of approximately 6.0 million square feet of gross leasable area located in the Mid-Atlantic region and the Chicago, Illinois metropolitan area. The Company currently owns approximately 75.3% 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 38 Properties directly and 18 Properties are owned by lower tier entities in which the Operating Partnership owns a 99% partnership interest and the Company (or a wholly-owned subsidiary of the Company) owns a 1% 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" or "Management Company") 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. 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 1998 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. The consolidated financial statements include the accounts of the Company and its majority owned entities, including the Operating Partnership. All significant intercompany balances and transactions have been eliminated. 4 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- Derivatives The Company may enter into various forward interest rate swap arrangements from time to time in anticipation of a specific debt transaction. These arrangements are used to manage the Company's exposure to fluctuations in interest rates. The Company does not utilize these arrangements for trading or speculative purposes. These arrangements, considered qualifying hedges, are not recorded in the financial statements until the debt transaction is consummated and the arrangement is settled. The proceeds or payments resulting from the settlement of the arrangement are deferred and amortized over the life of the debt as an adjustment to interest expense. Premiums paid to purchase interest rate protection agreements (such as caps) are capitalized and amortized over the terms of those agreements using the interest method. Unamortized premiums are included in deferred financing costs in the consolidated balance sheet. Amounts received under the interest rate protection agreements are recorded as a reduction of interest expense. 3. Acquisition of Rental Properties During the first three months of 1999, the Company acquired one shopping center for an aggregate acquisition cost of approximately $15,204. The acquisition was accounted for using the purchase method of accounting and the operations of the property is included in the Company's Statement of Operations from the date of acquisition. The following is a summary of the acquisition transaction: Date Total Anchor Anchor Acquired Property Name Location GLA Cost Tenant (GLA) -------- ------------- -------- ------ ----- ------ ------ 1/99 Kamp Washington Fairfax, Va 71,825 $15,204 Border Books 30,000 The acquisition was financed as follows: Number of Property Partnerships Market Assumed Mortgage Line of Credit Name Units Value Debt (1) Draw -------- ------------ ------ ---------------- -------------- Kamp Washington - - $3,045 $9,800 Cash Total ---- ----- $2,359 (2) $15,204
(1) Includes loan premiums. (2) Includes net proceeds from the sale of properties that occurred in the fourth quarter of 1998. Approximately $1,814 of net proceeds were used to acquire Kamp Washington in a Section 1031 tax free exchange. 5 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- The following unaudited pro forma financial information results of operations are presented as if the acquisitions and sales of the rental properties that occurred during 1998 and 1999, and the July 1998 offering had occurred on January 1, 1998. 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, ------------------------ (unaudited) 1999 1998 ---- ---- Pro forma Total Revenues $42,565 $39,310 ======= ======= Pro forma net income $ 5,083 $ 4,750 ======= ======= Pro forma earnings per Common Share - Basic $ 0.59 $ 0.56 ======= ======= Pro forma earnings per Common Share - Diluted $ 0.58 $ 0.55 ======= ======= 4. Mortgage Debt In February 1999 the Company signed an application with Metropolitan Life Insurance Company ("Met Life") for six separate loans totaling $75.0 million. The loans were all closed by June 30, 1999 as follows: Collateral Properties Amount Interest Rate Term (years) Closing Date ---------- ------ ------------- ------------ ------------ Mallard Creek Shopping Center $10,900 6.85% 10 April 30, 1999 McHenry Commons 6,700 6.85% 10 April 30, 1999 Davis Ford Crossing 10,700 6.79% 10 May 28, 1999 First State Plaza 13,700 6.79% 10 May 28, 1999 Valley Centre 21,200 6.84% 12 May 28, 1999 Fox Mill Shopping Center 11,800 6.84% 12 June 29, 1999 ------- $75,000 ======= There are six separate loans and six separate mortgages. The loans are not cross-collateralized and allow for the assumption of each individual loan to a qualified buyer upon sale of the property by the Company. The all-in weighted average interest rate of the loans will be 7.31% including the amortization of financing costs and the costs of closing out interest rate swap agreements as discussed below. Monthly debt service payments will be based on a 25 year amortization schedule. The proceeds of the loans were used to retire the Nomura loan ($38,500) Mallard Creek ($11,400) and McHenry Commons ($6,300) loans. Excess proceeds of approximately $18,800 were used to pay down the Company's line of credit. 6 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) With the application to Met Life the Company executed a rate lock agreement thereby fixing the interest rate for the term of the loans. Accordingly, in February 1999 the Company closed out the three swap agreements which were to commence in 1999. These agreements which had a combined notional amount of $73.5 million were closed out at combined cost for the Company of $3,100. This cost will be amortized over the life of the Met Life loan using the effective interest rate method. 5. Debentures The $25,000 8.25% Debentures matured on June 27, 1999. The holder of the Debentures exercised the option to exchange the Debentures for one million shares of Convertible Preferred Stock on June 27, 1999. The Debentures were collateralized by the Fox Mill and Penn Station properties which became unencumbered. Fox Mill was subsequently used as collateral for the Met Life loan. 6. Preferred Stock Effective June 1, 1999 shares of Convertible Preferred Stock became convertible into 1.282051 shares of Common Stock. As of June 30, 1999 591,680 shares of Convertible Preferred Stock were converted into 758,564 shares of Common Stock. The Company may redeem the Convertible Preferred Stock commencing July 15, 1999 at a redemption price of $27.44 per share. The redemption price reduces annually thereafter to $26.95, $26.46, $25.98, $25.49 and finally to $25.00 on July 15, 2004. 7. Stock Option Plan In May 1999 under the current Stock Option Plan the Company issued 183,000 options to officers and employees at a strike price of $20.75 per share and 20,000 options to its directors at a strike price of $21.75 per share. 8. Summary of Noncash Investing and Financing Activities Significant noncash transactions for the six months ended June 30, 1999 and 1998 were as follows: 1999 1998 ---- ---- Liabilities assumed in acquisition of rental properties $3,045 $15,201 Common units in the Operating Partnership issued in connection with the acquisition of rental properties - $20,341 Increase in minority interest's ownership of the Operating Partnership $1,307 $12,813 Accrued compensation paid through the issuance of Common Stock $1,129 $760 Exchange of Debentures for 1,000,000 shares of Preferred Stock $25,000 - 7 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- 9. Business Segments The Company owns one property type only i.e. neighborhood shopping centers. The Company's management makes decisions on allocation of resources, designs compensation packages and performs internal financial analysis based on the following business segments: Retail Properties FWM, Inc. Other (1) Total ---------- --------- --------- ----- Six months ended June 30, 1999: Revenues $ 41,933 $3,446 ($2,814) $ 42,565 Operating and maintenance expenses 9,993 3,676 (3,676) 9,993 -------- ------ ------ -------- Income (loss) from operations $ 31,940 ($ 230) $ 862 $ 32,572 ======== ====== ====== ======== Commercial real estate property expenditures $ 18,009 $ - $ - $ 18,009 ======== ====== ====== ======== Segment assets at June 30, 1999 $543,488 $ - $ - $543,488 ======== ====== ====== ======== Six months ended June 30, 1998: Revenues $ 34,348 $3,566 ($3,162) $ 34,752 Operating and maintenance expenses 8,584 3,226 (3,226) 8,584 -------- ------ ------ -------- Income from operations $ 25,764 $ 340 $ 64 $ 26,168 ======== ====== ====== ======== Commercial real estate property expenditures $ 59,482 $ - $ - $ 59,482 ======== ====== ====== ======== Segment assets at June 30, 1998 $488,091 $ - $ - $488,091 ======== ====== ====== ======== Retail Properties FWM, Inc. Other (1) Total ---------- --------- --------- ----- Three months ended June 30, 1999: Revenues $ 21,127 $1,636 ($1,323) $ 21,440 Operating and maintenance expenses 4,787 1,951 (1,951) 4,787 -------- ------ ------ -------- Income (loss) from operations $ 16,340 ($ 315) $ 628 $ 16,653 ======== ====== ====== ======== Commercial real estate property expenditures $ 605 $ - $ - $ 605 ======== ====== ====== ======== Segment assets at June 30, 1999 $543,488 $ - $ - $543,488 ======== ====== ====== ======== Three months ended June 30, 1998: Revenues $ 17,853 $1,521 ($1,262) $ 18,112 Operating and maintenance expenses 4,441 1,461 (1,461) 4,441 -------- ------ ------ -------- Income from operations $ 13,412 $ 60 $ 199 $ 13,671 ======== ====== ====== ======== Commercial real estate property expenditures $ 31,173 $ - $ - $ 31,173 ======== ====== ====== ======== Segment assets at June 30, 1998 $488,091 $ - $ - $488,091 ======== ====== ====== ======== 8 FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) --------- The following table reconciles income from operations for reportable segments to income before extraordinary items as reported in the Consolidated Statements of Operations. Three months ended Six months ended June 30, June 30, ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Income from operations for reportable segments $16,653 $13,671 $32,572 $26,168 General and administrative expenses (1,068) (1,015) (2,162) (1,852) Interest expense (5,677) (5,120) (11,202) (9,971) Depreciation and amortization (4,282) (3,656) (8,494) (6,921) Income allocated to minority interest (1,273) (887) (2,579) (1,953) Distributions to Preferred Stockholders (1,412) (1,410) (2,822) (2,820) Income (loss) from Management Company (315) 60 (230) 340 Gain on sale of properties - - - 1,683 ------- ------- ------- ------- Income before extraordinary items $2,626 $1,643 $5,083 $4,674 ======= ======= ======= ======= (1) Represents the adjustment for straight-lining of rents and reflecting the net income from FWM using the equity method of accounting. 10. Subsequent Events On July 16, 1999, 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, 1999, payable on August 15, 1999. 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, 1999 to the three months ended June 30, 1998 For the three months ended June 30, 1999, the net income allocated to common stockholders increased by $983 or 59.8% from $1,643 to $2,626, when compared to the three months ended June 30, 1998, due to an increase in revenues which were primarily due to the purchase of Parkville Shopping Center in April 1998, Elkridge Corners Shopping Center in May 1998, Village Shopping Center in June 1998, Wilston Centre I, Wilston Centre II and Town Center at Sterling in November 1998 (the "1998 Acquisitions"), and Kamp Washington in January 1999 (the "1999 Acquisition"), offset by an increase in expenses and income allocated to minority interest. 9 Total revenues increased by $3,328 or 18.4%, from $18,112 to $21,440, due primarily to an increase in minimum rents of $2,391 and tenant reimbursements of $707. The increases were primarily due to the 1998 Acquisitions and 1999 Acquisition. Property operating and maintenance expense increased by $346, or 7.8%, from $4,441 to $4,787, due primarily to the 1998 Acquisitions and the 1999 Acquisition. General and administrative expenses increased by $53 or 5.2%, from $1,015 to $1,068. Interest expense increased by $557, or 10.9%, from $5,120 to $5,677 due primarily to the increased mortgage indebtedness associated with the 1998 Acquisitions and the 1999 Acquisition. The average debt outstanding increased from $260.1 million for 1998 to $287.2 million for 1999 and the weighted average interest rate remained constant at 7.9%. Depreciation and amortization expenses increased by $626 or 17.1%, from $3,656 to $4,282, primarily due to the 1998 Acquisitions and the 1999 Acquisition. Income allocated to minority interests increased by $386 or 43.5% from $887 to $1,273 due to an increase in earnings of $1,371 ($308) and an increase in the minority interests' ownership of the Operating Partnership during the period from 22.5% to 23.9% ($77). Comparison of the six months ended June 30, 1999 to the six months ended June 30, 1998 For the six months ended June 30, 1999, the net income allocated to common stockholders increased by $767 or 17.8% from $4,316 to $5,083, when compared to the six months ended June 30, 1998, due to an increase in revenues which were primarily due to the purchase of Watkins Park Plaza in March 1998, Parkville Shopping Center in April 1998, Elkridge Corners Shopping Center in May 1998, Village Shopping Center in June 1998, Wilston Centre I, Wilston Centre II and Town Center at Sterling in November 1998 (the "1998 Acquisitions"), and Kamp Washington in January 1999 (the "1999 Acquisition"), and to a gain on sale of properties of $1,683 recorded during the first quarter of 1998 offset by an increase in expenses and income allocated to minority interest. Total revenues increased by $7,813 or 22.5%, from $34,752 to $42,565, due primarily to an increase in minimum rents of $5,440 and tenant reimbursements of $1,917. The increases were primarily due to the 1998 Acquisitions and the 1999 Acquisition. Property operating and maintenance expense increased by $1,409 or 16.4%, from $8,584 to $9,993, due primarily to the 1998 Acquisitions and the 1999 Acquisition. General and administrative expenses increased by $310 or 16.7%, from $1,852 to $2,162 due primarily to an increase in the amount of compensation paid or payable of Company stock of $106 and an increase in the amount of internal preacquisition costs of $138. Prior to March 19, 1998, internal preacquisition costs were capitalized and included in the cost of acquiring rental properties. Interest expense increased by $1,231, or 12.3%, from $9,971 to $11,202 due primarily to the increased mortgage indebtedness associated with the 1998 Acquisitions and the 1999 Acquisition. The average debt outstanding increased from $252.3 million for 1998 to $282.7 million for 1999 and the weighted average interest rate remained constant at 7.9%. Depreciation and amortization expenses increased by $1,573 or 22.7%, from $6,921 to $8,494, primarily due to the 1998 Acquisitions and the 1999 Acquisition. During 1998, there was a $1,683 gain on sale of the properties, and a $358 extraordinary loss due to the early extinguishment of debt. There were no such transactions during 1999. 10 Income allocated to minority interests increased by $626 or 32.1% from $1,953 to $2,579 due to an increase in earnings of $1,395 ($300) and an increase in the minority interests' ownership of the Operating Partnership during the period from 21.5% to 24.6% ($326). Earnings per Common Share-Diluted remained unchanged at $.58 due to items that occurred in 1998 but not in 1999. In 1998, there was gain on sale of properties of $1,683 and an extraordinary loss on early extinguishment of debt of $358. These items did not occur in 1999. If not for these items, Earnings per Common Share-Diluted for 1998 would have been $0.40. Liquidity and Capital Resources Indebtedness As of June 30, 1999, the Company had total mortgage indebtedness of approximately $259.1 million. The mortgage indebtedness consists of approximately $252.4 million in indebtedness collateralized by 40 of the Properties and tax-exempt bond financing obligations issued by the Philadelphia Authority for Industrial Development (the "Bond Obligations") of approximately $6.7 million collateralized by one of the properties. Of the Company's indebtedness, $18.5 million (7.1%) is variable rate indebtedness, and $240.6 million (92.9%) is at a fixed rate. The effective interest rates of the indebtedness range from 5.1% to 10.0%, with a weighted average interest rate of 7.6%, and will mature between 1999 and 2014. Approximately 16.1% of the Company's indebtedness will become due by 2000, requiring balloon payments of $7.8 million in 1999, and $24.4 million in 2000. From 1999 through 2014, the Company will have to refinance an aggregate of $205.5 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"). The Company has a collateralized revolving Line of Credit of up to $45,000 with Union Bank of Switzerland. This line is collateralized by seven properties (Kenhorst Plaza, Shoppes of Graylyn, Watkins Park Plaza, Four Mile Fork, Takoma Park, Centre Ridge Marketplace and Newtown Square). The line matures on January 31, 2001 and loans under this line will bear interest at LIBOR plus one percent (1%). The Company has an additional collateralized revolving Line of Credit of up to $5,775 from First Union Bank. Loans under this line will bear interest at LIBOR plus two percent (2%) per annum, and will mature on August 31, 1999. This Line of Credit is collaterized by a first mortgage lien on Brafferton Shopping Center. As of June 30, 1999, there was $5,300 outstanding under the Lines of Credit. 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 2000. 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. 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. 11 Other Year 2000 Issue The "Year 2000 Issue" is the result of many existing computer programs using only the last two digits to refer to a year. Therefore, these computer programs may not properly recognize a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail or create erroneous results. The Company is in the process of conducting a review of its computer systems to identify which systems could be affected by the "Year 2000" problem and to what extent such problems will have an impact on the Company 's ability to conduct its business. The Company has developed a Year 2000 Compliance Plan ("The Plan") to address these issues. The Plan is being managed by two of the Company's senior executives and has been approved by senior management. The progress of the Plan is being monitored by the Company's Board of Directors. The Plan focuses on four major components: IT systems such as the Company's accounting and property management software packages and related hardware; non-IT systems such as the Company's telephone system, voice mail system and other office equipment; the state of readiness of the Company's critical trading partners such as its banks, utilities and tenants; and embedded systems, particularly those located at the Company's Retail Properties such as sprinkler systems, security systems, etc. (Note: the Retail Properties access does not rely on elevator service because the structures are no higher than two stories.) The Plan contains ten phases as follows: Phase Description Estimated Estimated Start Date Completion Date - ----------------- ---------- --------------- 1. Educate senior management Commenced Completed 2. Designate a Plan manager Commenced Completed 3. Inventory all systems Commenced Completed 4. Contact suppliers of systems Commenced Completed 5. Send questionnaire to tenants All have been mailed Currently receiving responses 6. Send questionnaire to other critical trading partners Commenced Substantially completed, awaiting some responses 7. Prioritize problems (critical vs. non-critical) Commenced September 1, 1999 8. Identify solutions (repair or replace) Commenced September 1, 1999 9. Test Solutions July 1, 1999 September 30, 1999 10.Anticipate contingencies including the most reasonably likely worst case scenarios Commenced Continuous The Company has incurred approximately $40 to date in the implementation of the Plan. These costs have primarily been incurred to upgrade the desktop PC's at the Company's home office. The Company has determined that implementing the Plan will cost less than $100. However, the Company has budgeted $500 to replace its current accounting and property management software system. Although the Company believes that the current system is materially Year 2000 compliant the Company has decided to migrate because of the improved technology and reporting capabilities of the new system. The Company anticipates going live on the new system by October 1, 1999 and will be tested for Year 2000 compliant by November 1, 1999. These costs will be funded from the Company's cash flow. The Plan efforts will be primarily staffed by employees of the Company. The most reasonably likely worst case scenario is that the Company's tenants are delayed in generating their rental payments due to their own Year 2000 IT problems. If this occurs the Company's property managers will attempt to accelerate rental payments by requesting manual checks by personally visiting the tenants or by contacting the appropriate personnel at the tenants' accounts payable departments. Also, the Company will have available its Lines of Credit to fund immediate cash flow needs if such delay occurs. 12 The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all Year 2000 issues are not properly identified, or if assessment, remediation and testing are not effected timely or accurately with respect to Year 2000 issues that are identified, there can be no assurance that the Year 2000 issue will not materially adversely affect the Company's results of operations. Also, there can be no assurance that the Year 2000 issues of the Company's suppliers, vendors, tenants and other important trading partners will not have a material adverse impact on the Company's business or results of operations. The costs of the Company's Year 2000 identification, assessment, remediation and testing efforts and the dates on which the Company believes it will complete such efforts are based upon management's best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of relevant computer codes and embedded technology, and similar uncertainties. Although some of the Company's agreements with suppliers and contractors contain provisions requiring such parties to indemnify the Company under some circumstances, there can be no assurance that such indemnification agreements will cover all of the Company's liabilities and costs related to claims by third parties related to the Year 2000 issue. Item 3. Qualitative and Quantitative Disclosure about Market Risk The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by management as an integral part of the Company's overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company's results. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as swap and cap agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. The effect of interest rate fluctuations historically has been small relative to other factors affecting operating results, such as rental rates and occupancy. The Company's operating results are affected by changes in interest rates on variable rate borrowings including the Company's Line of Credit facilities as well as other mortgages and notes with variable interest rates. If interest rates increased by 100 basis points, the Company's interest expense for the six months ended June 30, 1999 would have increased by $183, based on balances during the year ending June 30, 1999. The following is a summary of the Company's long term debt as of June 30, 1999: Expected Maturity Date of Balloon Payments 1999 2000 2001 2002 2003 Thereafter ------- ------- ------- ------- ------- ---------- FIXED RATE $7,731 $24,367 $735 $11,843 $14,926 $130,898 - -------------- Average Interest Rate 7.7% 8.5% 6.5% 7.1% 7.2% 7.6% VARIABLE RATE - -------------- LIBOR-based(1): Line of Credit (LIBOR plus 1.0%)(2) 5,300 Ashburn Farms (LIBOR plus 1.5%) 6,451 ------- ------- ------- ------- ------- ---------- Total LIBOR-based 0 0 11,751 0 0 0 Tax-exempt: Mayfair Shopping Center (3) 3,235 ------- ------- ------- ------- ------- ---------- Total variable rate debt 0 0 11,751 0 0 3,235 ------- ------- ------- ------- ------- ---------- Total Debt $7,731 $24,367 $12,486 $11,843 $14,926 $134,133 ======= ======= ======= ======= ======= ========== 13 Fair Value of Debt as of Total 06/30/99 -------- ----------- $190,500 $244,101 7.7% 5,300 5,300 6,451 6,451 -------- ----------- 11,751 11,751 3,235 3,235 -------- ----------- 14,986 14,986 -------- ----------- $205,486 $259,087 ======== ===========
(1) At June 30, 1999 the LIBOR rate was 5.18%. (2) This schedule assumes that the Line of Credit is repaid at the maturity date. Management believes that the line will be renewed at maturity under similar terms. (3) The interest rate is determined weekly at the rate necessary to produce a bid in the process of remarketing the obligation equal to par plus accrued interest. The Company also pays a 1.5% letter of credit enhancement fee to Mellon Bank. Currently the Company has only one interest rate swap contract in effect. The notional amount is $24,000, the contract period is May 1, 2000 through May 2, 2005. The Company pays a fixed rate of 5.85% and receives the 30 day libor rate. As of June 30, 1999, this swap contract has a fair market value of approximately $453. If interest rates increase by 100 basis points, the fair market value of this interest rate hedge contract as of June 30, 1999 would increase by approximately $900. If interest rates decrease by 100 basis points, the fair market value of this interest rate hedge contract as of June 30, 1999 would decrease by approximately $1,000. In addition, we are exposed to certain losses in the event of nonperformance by the counter party under the hedge contract. We expect the counter party, which is a major financial institution, to perform fully under this contract. However, if the counter party were to default on their obligations under the interest rate hedge contract, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contract. 14 Part II OTHER INFORMATION Item 2. Recent Sales of Unregistered Equity Securities None Item 4. Submission of matters to a vote of security holders On May 7, 1999 the Company held its annual meeting of shareholders. The matters on which the shareholders voted, in person or by proxy, were (i) for the election of two nominees to serve on the Board of Directors for a term of three years or until their respective successors are duly elected and qualify and (ii) the ratification of the appointment of PricewaterhouseCoopers as the Company's independent auditors. The two nominees were elected and the ratification of the appointment of the independent auditors was approved. The results of the voting are shown below: Election of Directors: Votes Cast Against or Director Votes Cast For Withheld -------- -------------- ---------- William J. Wolfe 8,433,133 27,523 Matthew J. Hart 8,431,133 29,523 Ratification of Appointment of Independent Auditors: Votes Cast Against or Votes Cast For Withheld -------------- ---------- 8,430,257 30,399 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule - ----------------------------------------------------------------------- (b) Reports on Form 8-K. An interim report on Form 8-K was filed on March 10, 1999 reporting the acquisition of two retail properties. Three interim reports on Form 8-K were filed on March 24, 1999 including certain exhibits thereto. An interim report on Form 8-K was filed on March 24, 1999 regarding Risk Factors. 15 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, 1999 /s/ William J. Wolfe ----------------------------------- By: William J. Wolfe President and Chief Executive Officer Date: August 13, 1999 /s/ James G. Blumenthal ----------------------------------- By: James G. Blumenthal Executive Vice President and Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-mos DEC-31-1999 JUN-30-1999 4,045 0 9,385 0 0 0 574,125 59,564 543,488 0 269,805 0 27 94 243,830 543,488 0 42,565 0 20,649 0 0 11,202 5,083 0 5,083 0 0 0 5,083 .59 .58
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