-----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, SNe7bkfhOnrfRDiV55Q4lpA/Al7i1OdOh9aH8nriE+MySgF87YFh8GCxdKOqK771 K57tHVG1gqixp9rQ7w3+ug== 0000912057-97-008774.txt : 19970317 0000912057-97-008774.hdr.sgml : 19970317 ACCESSION NUMBER: 0000912057-97-008774 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN INVESTMENT REAL ESTATE TRUST CENTRAL INDEX KEY: 0000106135 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946100058 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08723 FILM NUMBER: 97556324 BUSINESS ADDRESS: STREET 1: 3450 CALIFORNIA ST CITY: SAN FRANCISCO STATE: CA ZIP: 94118 BUSINESS PHONE: 4159290211 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 0-2809 WESTERN INVESTMENT REAL ESTATE TRUST - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-6100058 - ------------------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3450 CALIFORNIA STREET, SAN FRANCISCO, CA 94118 - ------------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 929-0211 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- 8% CONVERTIBLE DEBENTURES DUE 2008 AMERICAN STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: SHARES OF BENEFICIAL INTEREST, WITHOUT PAR VALUE - -------------------------------------------------------------------------------- (Title of class) 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting shares held by nonaffiliates of the registrant on January 31, 1997, based on the reported closing sales price of the Trust's shares of beneficial interest on the American Stock Exchange on such date, was $216,091,000. (The Trust defines affiliates as those required to report under Section 16 of the Securities Exchange Act of 1934). Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Shares of Beneficial Interest, No Par Value - 17,138,432 shares as of January 31, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Trust's proxy statement with respect to its 1997 Annual Meeting of Shareholders which will be filed with the Commission regarding the fiscal year covered by this Form 10-K are incorporated by reference in Part III, Items 10, 11 and 12. WESTERN INVESTMENT REAL ESTATE TRUST INDEX TO 10-K PART I Page ---- Item 1 Business 3 to 10 Item 2 Properties 10 to 14 Item 3 Legal Proceedings 15 Item 4 Submission of Matters to a Vote of Security Holders 15 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6 Selected Financial Data 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 to 19 Item 8 Financial Statements 20 to 37 Financial Statement Schedule 38 to 39 Additional Information: 1996 Building Improvement and Leasing Commission Additions (unaudited) 40 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 41 PART III Item 10 Directors and Executive Officers of the Registrant 41 Item 11 Executive Compensation 41 Item 12 Security Ownership of Certain Beneficial Owners and Management 41 Item 13 Certain Relationships and Related Transactions 41 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 42-44 Signatures 45 2 PART I ITEM 1. BUSINESS. (a) GENERAL DEVELOPMENT OF BUSINESS. Western Investment Real Estate Trust ("The Trust") is a real estate investment trust ("REIT") and qualifies as such under Sections 856 and 960 of the Internal Revenue Code. The Trust was organized under the laws of the State of California in 1962 and commenced real estate operations in 1964. In order that the Trust may continue to qualify as a real estate investment trust: (i) more than 75% of the Trust's total assets must be invested in real estate, cash, cash items or government securities, (ii) at least 75% of the Trust's gross income must be derived from real estate assets, (iii) the Trust can hold no property primarily for sale to customers in the ordinary course of business, (iv) beneficial ownership of the Trust must be held by more than 100 persons during at least 335 days of each taxable year, and (v) the Trust must distribute annually to its shareholders an amount equal to or exceeding 95% of its real estate investment trust taxable income. Under the terms of its Declaration of Trust, the Trust is permitted to invest its funds in ownership of real estate, mortgages, deeds of trust and certain financial instruments as permitted by law. Substantially all of the Trust's funds have been invested in the ownership of real estate. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Trust is not engaged in different segments of a business nor is the Trust engaged in more than one line of business. (c) NARRATIVE DESCRIPTION OF BUSINESS. The Trust, which at December 31, 1996 employed 49 people, is in the business of acquiring, managing, leasing and developing retail, commercial and industrial properties. At December 31, 1996, the Trust owned 48 retail properties, 10 commercial properties and 2 industrial properties with a combined gross leasable area of 4.8 million square feet. The Trust has its executive office at 3450 California Street, San Francisco, California, 94118, and can be reached at (415) 929-0211. Additionally, the Trust maintains two regional offices. 3 The Trust's portfolio of 60 properties at December 31, 1996 is summarized as follows:
PROPERTY TYPE STATE NUMBER OF LAND GROSS LEASABLE AREA ----- ---------- ---- ------------------- PROPERTIES (Square Feet) (Square Feet) ---------- Shopping Center and Retail California 39 15,896,496 3,884,080 Nevada 9 4,026,117 663,202 -- ---------- --------- Total Shopping Center and Retail 48 19,922,613 4,547,282 Commercial California 10 634,669 180,587 Industrial California 1 274,311 58,022 Colorado 1 162,500 20,300 -- ---------- --------- Total Industrial 2 436,811 78,322 -- ---------- --------- Total 60 20,994,093 4,806,191 -- ---------- --------- -- ---------- ---------
At December 31, 1996, occupancy for each property type is as follows: PROPERTY TYPE OCCUPANCY RATE (1) ------------- ------------------ Shopping Center and Retail 93.9% Commercial 86.0% Industrial 100.0% Average Occupancy for All Property Types 93.7% (1) Once a space is subject to an executed lease, the space is then included in occupied space. A space continues to be incorporated in our occupied space until: (1) the related lease expires and the tenant is no longer in legal possession, or (2) the related lease is formally terminated and the tenant is no longer in legal possession. The following table summarizes the composition of the Trust's real estate investments as of December 31, 1996 by type based on amounts invested by the Trust. PORTFOLIO SUMMARY
Number of Amount of Percentage investments investments ---------- ----------- ----------- Shopping Center and Retail 48 $371,193,000 93% Commercial 10 26,584,000 6% Industrial 2 2,934,000 1% -- --------- -- 60 $400,711,000 100% -- ------------ ---- -- ------------ ----
The Trust owns 23 unimproved pads located within or adjacent to the property lines of its shopping centers that are available for development and leasing. Additionally, the Trust owns a total of 25 acres of undeveloped land: 12 acres adjacent to its North Hills Shopping Center and 13 acres adjacent to its Elko Shopping Center, both of which are located in Nevada. 4 The weighted average age of the Trust's 60 properties is 13.3 years. The weighted average age of the Trust's commercial, industrial and retail properties is 22.5 years, 16.4 years and 12.9 years, respectively. This calculation is weighted by Gross Leasable Area and is based on the original construction date of the property. As such, any expansion or renovation occurring subsequent to the original construction date is not reflected in this calculation. CURRENT ECONOMIC CLIMATE During the early part of the 1990s, the California economy experienced its worst recession in 60 years. The estimated half million jobs lost in California between 1990 and 1993 drove the unemployment rate up to 9.2% from 5.1%. Today's economy is much healthier. Since 1994, all the jobs lost during the 1990 to 1993 period have been replaced and currently the State of California is now outpacing the national average in job creation (200,000 jobs were created in 1995 alone) and new business incorporations. Several economic forecasts expect this growth pattern to continue in the near term. This recovery has been broad-based and has impacted virtually all major regions. Over the past two years, the state has replaced an economy based on defense by one founded on trade, high technology and tourism/entertainment. The new economy is largely the result of an increase in the number of young, small and mid-sized enterprises. Companies employing under 100 employees now comprise 52% of the state's workforce, up from 42% in 1979. In 1995, 75% of the jobs created in the state were by companies with less than 200 employees. The Trust believes that as the dominant shopping center owner in Northern California, improvements in the California economy will strengthen the Trust's operating results as occupancy continues to increase and rental rates continue to stabilize and improve. COMPETITION During the past several years, volume discount retailers, such as Wal-Mart and Costco, have entered certain areas of California and Nevada where Trust community shopping center properties are located. The Trust expects that these discounters may positively or negatively affect certain of the Trust's shopping center tenants. The Trust believes that its tenants could benefit if these discounters attract additional customers to nearby Trust properties and thereby generate increased sales for Trust tenants. Conversely, the Trust's tenants could be negatively affected if discounters draw customers away from the Trust's properties. The Trust believes that to date the trend has had no significant impact on the Trust's results of operations. The Trust competes for quality properties with other investors and engages in a continuing effort to identify desirable properties for acquisition. As the number of prospective buyers of the types of properties the Trust considers for purchase increases, the prices of such properties may increase and the yield decrease. The Trust believes it can continue to compete effectively in the current real estate environment because of its experienced staff and management team. 5 The Trust competes for tenants primarily on the basis of location, rental rates, services provided and the design and condition of the properties. In some of the geographic areas in which the Trust owns properties, the available supply of space for lease exceeds the demand by prospective tenants. In order to compete effectively, the Trust employs experienced property and marketing managers and leasing agents. TENANTS The Trust's principal shopping center and retail tenants include substantial, well-recognized businesses such as Food-4-Less, Nob Hill Foods, PayLess Drugs, Pak N Save, Raley's, Safeway, Save Mart Supermarket and Thrifty Drug. No single property investment accounted for more than 4.5% of total revenues in 1996. At December 31, 1996, Raley's, the Trust's most significant tenant, a grocery and drug retailer, was a lessee in 19 of the Trust's properties and accounted for 20% of the Trust's 1996 total revenues. Raley's, a privately owned company, currently operates 84 stores in Northern California and Nevada. The Raley's organization has released information indicating that its sales exceeded $1.9 billion in its most recently reported fiscal year ended June 29, 1996. The Trust receives audited financial statements annually from Raley's and uses them to monitor Raley's financial position and results of operations. Additionally, the Trust is authorized to provide Raley's audited financial statements to Moody's Investors Service and Standard & Poor's, the Trust's rating agencies. As of December 31, 1996, the Trust's convertible debentures and senior notes carry "investment grade" rating from Moody's Investors Service (Baa(3)) and Standard & Poor's (BBB). Please see Notes 7 and 8 in the Notes to the Financial Statements. The following table provides the location, size and expiration of the Raley's leases: LEASE LOCATION GROSS LEASABLE AREA EXPIRATION DATE - -------------------- ------------------- --------------- 1. Fallon, NV Note (1) 6/30/03 2. Fair Oaks, CA 59,231 3/31/06 3. Yuba City, CA 61,842 9/01/08 4. Carson City, NV 59,018 8/31/12 5. Redding, CA 60,000 5/31/14 6. Yreka, CA 60,000 11/30/14 7. Chico, CA 61,046 4/30/15 8. Winnemucca, NV 60,000 12/31/15 9. Fallon, NV 60,114 2/28/16 10. Reno, NV 61,046 3/31/16 11. Ukiah, CA 61,046 6/30/16 12. Elko, NV 61,000 1/31/17 13. Vallejo, CA 60,114 9/30/17 14. Folsom, CA 60,114 12/31/17 15. Turlock, CA 60,114 2/28/18 16. Grass Valley, CA 60,114 4/30/18 17. Granite Bay, CA 60,114 6/30/18 18. Suisun City, CA 60,114 5/31/19 19. Oroville, CA 59,885 6/01/19 Note (1): Although Raley's no longer occupies this Fallon, Nevada, property, it guarantees the J. C. Penney and Hub leases and makes supplemental lease payments to the Trust. 6 Major Producers of 1996 Total Revenue ------------------
Tenant Total % of Total Number of ------ Revenue Revenues Locations ------- -------- --------- 1) Raley's Supermarkets $9,382,000 20.0% 19 2) Coast Federal Bank 1,948,000 4.1% 6 3) Save Mart Supermarkets 1,740,000 3.7% 7 4) PayLess Drugs/Thrifty's 1,658,000 3.5% 10 5) Safeway/Pak N Save 1,499,000 3.2% 3 6) Food-4-Less 1,161,000 2.5% 3 7) Nob Hill Foods. 989,000 2.1% 3 8) Round Table Pizza 751,000 1.6% 13 9) Ross Stores 745,000 1.6% 3 10) Scolari's Supermarket 556,000 1.2% 1
The Trust receives sales and other information on a monthly, quarterly or annual basis from its retail tenants, including Raley's, under leases which provide for such reports. The Trust uses this information to monitor the payment of percentage rents where leases so provide. The Trust recognized $649,000 and $559,000 of percentage rents during 1996 and 1995, respectively. Virtually all of the Trust's existing leases include at least one of the following provisions for payment of additional rent: (1) scheduled fixed increases, (2) percentage rent based on tenants' gross sales, or (3) CPI-based escalation clauses. The Trust endeavors to structure leases on a triple-net basis with the lessees being responsible for most operating expenses, such as real estate taxes, certain types of insurance, utilities, normal repairs and maintenance. To the extent such provisions cannot be negotiated and incorporated into a lease and in regard to vacant space, the Trust pays such expenses from current operating income. Most of the Trust's leases require the tenant to be responsible for, or reimburse the Trust for liability insurance coverage on the properties. The Trust maintains umbrella liability insurance on all of its properties and monitors tenant compliance with liability insurance coverage requirements. While the Trust believes its properties are adequately insured, the Trust does not carry earthquake, flood or pollution coverage. However, most major anchor tenants are required to rebuild or repair their leased premises if damaged or destroyed, regardless of the cause. Most of the Trust's properties are located in areas of California and Nevada where earthquakes have been known to occur. In the event of a major earthquake, Trust properties could suffer substantial damage or destruction. Since it commenced real estate operations in 1964, the Trust has not incurred any material expense nor, to its knowledge, have any of its properties incurred any material damage from earthquakes or floods. The Trust periodically considers the merits of purchasing earthquake insurance. To date the Trust has not purchased earthquake insurance because of (i) the high premiums and deductibles and (ii) the Trust's geographically diversified portfolio that reduces the likelihood of material loss as a consequence of earthquakes. Furthermore, the majority of properties in the portfolio principally comprise single-story, relatively new buildings. 7 TENANT LEASE EXPIRATIONS AND RENEWALS The following table shows lease expirations for the leases in effect as of December 31, 1996, for the next ten years, assuming none of the tenants exercise renewal options:
Percentage of Average Total Leased Base Rent Gross Per Sq. Ft. Leasable Area No. of Gross Leasable Annualized Base Under Represented Expiration Leases Area in Rent Under Expiring by Expiring Year Expiring Square Feet Expiring Leases Leases Leases ---- -------- ----------- --------------- ------ ------ 1997 71 134,480 $ 1,833,755 $13.64 3.0% 1998 135 278,135 3,528,886 12.69 6.2% 1999 116 255,904 2,934,700 11.47 5.7% 2000 77 291,879 3,629,724 12.44 6.5% 2001 56 292,264 2,577,198 8.82 6.5% 2002 30 195,287 1,502,875 7.70 4.3% 2003 26 279,908 2,593,338 9.26 6.2% 2004 13 82,614 751,734 9.10 1.8% 2005 12 109,180 1,214,808 11.13 2.4% 2006 7 183,095 1,477,044 8.07 4.1% ---- -- --------- ----------- ---- Total 543 2,102,746 $22,044,062 46.7% --- --------- ----------- ----- --- --------- ----------- -----
ASSET MANAGEMENT - ---------------- The Trust is a fully integrated REIT that provides full asset management services to all but two of its properties. Asset management includes property management, marketing and leasing support. Internal management provides for regular interaction between the Trust and its tenants and close supervision of its properties. The Trust directly manages 58 of its 60 properties. In order to facilitate its present and future asset management activities, the Trust maintains two branch offices which are centrally located to the properties. The offices are located at the Trust's Country Gables shopping center in Granite Bay, California and at the Victorian Walk shopping center in Fresno, California. Internal management permits the Trust to provide value added services to its tenants. For example, the Trust's marketing staff works with the Trust's tenants on promotional and advertising activities to draw consumers to the shopping centers. These activities help the Trust attract and retain the national, regional and local retail tenants which serve the Northern California and Nevada markets. The Trust believes the cost of internal property management and leasing is generally less expensive than employing independent property management, marketing and leasing firms due to lower commissions and fees and certain economies of scale. 8 Two of the Trust's 60 properties are managed by independent property managers. G & W Management Co. provides management services for the property located in Petaluma, California, for fees equal to 3.5% of gross receipts. The Trust's property is part of a larger office park which is managed by G & W Management Co. Commercial Real Estate Service (CRES) provides management services with respect to Serra Center, located in Colma, California, for fees equal to 3.5% of gross rents plus tenant administrative and management fees paid by the tenants attributable to the Trust's 30% interest in the center. CRES is an affiliate of the co-owner of the Serra Center and has been managing the property for approximately 20 years. Neither one of the above-named property managers are affiliated with the Trust, its trustees, officers or any shareholder owning 5% or more of the Trust's shares. Repairs and maintenance of the Trust's properties not undertaken by tenants under the terms of the Trust's triple-net leases are performed by independent contractors not affiliated with the Trust, its trustees or officers, or any shareholder owning 5% or more of the Trust's shares. POTENTIAL ENVIRONMENTAL RISKS Investments in real property create a potential for environmental liability on the part of the owner of such real property. If hazardous substances are discovered on or emanating from any of the Trust's properties, the Trust and/or others may be held strictly liable for all costs and liabilities relating to the clean-up of such hazardous substances. In order to mitigate environmental risks, in 1989 the Trust adopted a policy of obtaining at least a Phase I environmental study (a preliminary site assessment which does not include environmental sampling, monitoring or laboratory analysis) on each property it seeks to acquire. From time to time, when the Trust deems it appropriate, it has obtained independent environmental analyses on properties acquired prior to 1989. Although the Trust has no knowledge that any material environmental contamination has occurred, no assurance can be given that hazardous substances are not located under any of the properties. The Trust carries no express insurance coverage for the type of environmental risk described above. The Trust assesses on an ongoing basis measures necessary to comply with environmental laws and regulations. In conducting its assessments, the Trust has identified the following matters: OAKLAND, CALIFORNIA During 1994, the Trust concluded the sale of its industrial property in Oakland, California. In accordance with the terms of the sale agreements, under certain conditions, the Trust would be responsible for a portion of the environmental clean-up costs. During January 1997, Alameda County gave notice that the environmental issues pertaining to this site were closed and no further action would be necessary. VALLEJO, CALIFORNIA The restoration work related to the disturbance of wetlands at the Trust's Park Place Shopping Center in Vallejo, California, is currently underway. It is the Trust's current estimate that the remaining cost of this restoration could be as much as $100,000. 9 UNDERGROUND STORAGE TANKS The Trust, as far as it is aware, owns only one property that presently contains underground storage tanks. The Trust has no knowledge of any leakage or contamination resulting from these tanks that will have a material impact on its financial position or results of operations. However, there is a potential for contamination from reported off-site leaking petroleum underground storage tanks located on properties adjacent to certain Trust properties. There is reported soil contamination from underground storage tanks removed from the Heritage Place Shopping Center in Tulare, California, prior to its acquisition by the Trust. The Tulare County environmental officials ordered the prior owner to clean up this soil contamination. Should the prior owner fail to complete remediation, the Trust's exposure could be as much as $50,000 per the current estimate by an environmental consultant. The probable overall costs of these measures cannot be determined at this time due to uncertainty about the extent of environmental risks and the Trust's responsibility, the complexity of environmental laws and regulations, and the selection of alternative compliance approaches. However, the Trust is not aware of any environmental conditions that it believes will have a material impact on its financial position or results of operations. ITEM 2. PROPERTIES. Property information is presented on the following pages. 10 Item 2: Properties
Minimum Rent ----------------------- 12/31/96 Year Year Last Name Location 1996 1995 Occupancy (1) Completed Renovated ---- -------- ---- ---- ------------- --------- --------- (in thousands) I. Minimum Rents Shopping Center/Retail ---------------------- Luckys El Cerrito, CA $241 $241 100.00% 1964 1983 San Antonio Center Mountain View, CA 483 495 96.70% 1959 1990 Luckys Santa Maria, CA 49 49 100.00% 1962 1995 Denny's (3) Redwood City, CA 21 66 SOLD 1968 Carpeteria Concord, CA 228 228 100.00% 1963 Kwik Stop (3) Santa Rosa, CA 35 59 SOLD 1970 1995 Acapulco Y Los Arcos Fresno, CA 125 124 100.00% 1972 Serra Center (30% interest) Colma, CA 495 505 100.00% 1972 Dodge Center Fallon, NV 282 281 100.00% 1976 1995 West Town Winnemuca, NV 461 462 100.00% 1978 1991 Nob Hill General Store Watsonville, CA 195 195 100.00% 1982 Eastridge Plaza Shopping Center Porterville, CA 479 462 83.47% 1985 Angel's Camp Town Center Angel's Camp, CA 571 584 98.51% 1986 Heritage Place Shopping Center Tulare, CA 1,005 1,024 95.64% 1986 Raley's Shopping Center Yuba City, CA 971 912 94.62% 1963 1995 Canal Farms Shopping Center Los Banos, CA 853 799 98.64% 1988 Kmart Center Sacramento, CA 372 357 87.61% 1964 1986 Park Place Shopping Center Vallejo, CA 1,579 1,504 97.35% 1987 Blossom Valley Plaza Turlock, CA 1,102 1,178 96.24% 1988 1991 Coalinga Shopping Center Coalinga, CA 323 338 96.90% 1977 Commonwealth Square Shopping Center Folsom, CA 1,592 1,487 96.12% 1988 Country Gables Shopping Center Granite Bay, CA 1,247 1,288 87.97% 1988 Heritage Oak Shopping Center Gridley, CA 462 418 81.67% 1981 Belle Mill Landing Red Bluff, CA 812 781 95.33% 1982 1995 Anderson Square Anderson, CA 327 242 92.41% 1979 North Hills Shopping Center Reno, CA 831 803 90.75% 1986 Cobblestone Shopping Center Redding, CA 930 999 87.81% 1981 Victorian Walk Shopping Center Fresno, CA 795 775 96.79% 1982 1994 Elko Junction Shopping Center Elko, NV 822 956 91.23% 1979 Elko Junction (Phase II) Elko, NV 211 8 100.00% 1994/1996 Skypark Plaza Shopping Center Chico, CA 1,297 1,318 92.41% 1985 1991 continued on next page 11 Item 2: Properties Minimum Rent ----------------------- 12/31/96 Year Year Last Name Location 1996 1995 Occupancy (1) Completed Renovated ---- -------- ---- ---- ------------- --------- --------- (in thousands) Heritage Park Shopping Center Suisun, CA 1,223 1,198 90.11% 1989 Pinecreek Shopping Center Grass Valley, CA 939 887 92.71% 1988 Eagle Station Shopping Center Carson City, CA 892 879 90.17% 1982 Currier Square Shopping Center Oroville, CA 1,002 1,010 96.35% 1969 1989 Yreka Junction Yreka, CA 629 729 96.87% 1984 Ukiah Crossroads Shopping Center Ukiah, CA 854 880 87.45% 1986 Raley's Supermarket Fallon, NV 401 401 100.00% 1991 Caughlin Ranch Shopping Center Reno, NV 969 880 96.44% 1990 1991 Mercantile Row Shopping Center Dinuba, CA 743 744 96.80% 1990 Elverta Crossing Shopping Center Sacramento, CA 1,185 1,208 85.83% 1991 1993 Centennial Plaza Shopping Center Hanford, CA 1,204 1,228 100.00% 1991 Laguna 99 Shopping Center Elk Grove, CA 1,356 1,321 100.00% 1993 Mission Ridge Shopping Center Manteca, CA 1,112 1,175 93.07% 1993 Northridge Shopping Center Fair Oaks, CA 770 668 96.46% 1958 1986 Plaza 580 Shopping Center Livermore, CA 1,419 1,442 84.38% 1993/1996 Nob Hill General Store Hollister, CA 480 480 100.00% 1994 Nob Hill General Store Newman, CA 313 272 100.00% 1995 -------- -------- Sub-total - Shopping Center/ Retail $34,687 $34,340 -------- -------- Industrial ---------- Viking Freight Systems Santa Clara, CA $422 $415 100.00% 1978 Merchants, Inc. Commerce City, CO 115 115 100.00% 1984 1995 -------- -------- Sub-total - Industrial $537 $530 -------- -------- Commercial ---------- US Postal Service Boulder Creek, CA $6 $25 0.00% 1959 Coast Savings & Loan Cupertino, CA 216 197 100.00% 1980 Coast Savings & Loan (Taraval St) San Francisco, CA 328 328 100.00% 1975 Coast Savings & Loan Monterey,CA 450 450 100.00% 1963 Coast Savings & Loan (Market St) San Francisco, CA 291 291 100.00% 1964 Coast Savings & Loan Santa Cruz, CA 184 180 100.00% 1980 Coast Savings & Loan Salinas, CA 320 311 100.00% 1937 3450 California St San Francisco, CA 226 219 100.00% 1957 1987 continued on next page 12 Item 2: Properties Minimum Rent --------------------------- 12/31/96 Year Year Last Name Location 1996 1995 Occupancy (1) Completed Renovated ---- -------- ---- ---- ------------- --------- --------- (in thousands) Redwood II Petaluma, CA 483 619 47.58% 1985 Heald Business College Milpitas, CA 513 151 100.00% 1987 1995 -------- -------- Sub-total - Commercial $3,017 $2,771 -------- -------- Total Minimum Rent $38,241 $37,641 -------- -------- -------- --------
Percentage Rents --------------------------- 1996 1995 ------ ------ (in thousands) II. Percentage Rent Kmart Napa, CA $122 $115 100.00% 1964 Luckys Santa Maria, CA 104 99 100.00% 1962 1995 Denny's (3) Redwood City, CA 2 0 SOLD 1968 Dodge Center Fallon, NV 2 18 100.00% 1976 1995 Nob Hill General Stores Watsonville, CA 84 76 100.00% 1982 Kmart Center Sacramento, CA 47 45 87.61% 1964 1986 Park Place Shopping Center Vallejo, CA 21 8 97.35% 1987 Coalinga Shopping Center Coalinga, CA 62 47 96.90% 1977 Commonwealth Square Shopping Center Folsom, CA 5 6 96.12% 1988 Country Gables Shopping Center Granite Bay, CA 1 0 87.97% 1988 Heritage Oak Shopping Center Gridley, CA 60 10 81.67% 1981 Belle Mill Landing Red Bluff, CA 0 3 95.33% 1982 1995 Anderson Square Anderson, CA 56 44 92.41% 1979 Cobblestone Shopping Center Redding, CA 4 6 87.81% 1981 Victorian Walk Shopping Center Fresno, CA 2 0 96.79% 1982 1994 Elko Junction Shopping Center Elko, NV 0 1 91.23% 1979 Heritage Park Shopping Center Suisun, CA 2 9 90.11% 1989 Pinecreek Shopping Center Grass Valley, CA 1 0 92.71% 1988 Eagle Station Shopping Center Carson City, CA 18 6 90.17% 1982 Yreka Junction Yreka, CA 0 1 96.87% 1984 Caughlin Ranch Shopping Center Reno, NV 0 2 96.44% 1990 1991 continued on next page 13 Item 2: Properties Percantage Rents ----------------------- 12/31/96 Year Year Last Name Location 1996 1995 Occupancy (1) Completed Renovated ---- -------- ---- ---- ------------- --------- --------- (in thousands) Centennial Plaza Shopping Center Hanford, CA 2 0 100.00% 1991 Northridge Shopping Center Fair Oaks, CA 54 63 96.46% 1958 1986 -------- -------- -------- -------- Total Percentage Rent Income $649 $559 -------- -------- -------- --------
Direct Financing Leases (2) --------------------------- 1996 1995 ------ ------ (in thousands) III. Direct Financing Leases Kmart Napa, CA $99 $127 100.00% 1964 Viking Freight Systems Santa Clara, CA 98 106 100.00% 1978 -------- -------- $197 $233 -------- -------- -------- --------
(1) Once a space is subject to an executed lease, the space is then included in occupied space. A space continues to be incorporated in our occupied space until: 1) the related lease expires and the tenant is no longer in legal possession, or 2) the related lease is formally terminated and the tenant is no longer in legal possession. (2) Included in Other Income. (3) Sold in 1996. 14 ITEM 3. LEGAL PROCEEDINGS. The Trust is involved in various legal actions arising in the normal course of business. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that their outcome will not have a material adverse effect on the Trust's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Principal Market: The shares of beneficial interest of the Trust, without par value, are listed on the American Stock Exchange under the symbol "WIR". The following table sets forth the high and low sales prices of the shares as reported by the American Stock Exchange:
QUARTER ENDED HIGH LOW DIVIDENDS - ------------- ---- --- --------- March 31, 1995 $13 $11-1/4 $0.28 June 30, 1995 12-3/4 11-1/4 0.28 September 30, 1995 12-1/4 11-1/4 0.28 December 31, 1995 11-3/4 10-3/8 0.28 March 31, 1996 $11-3/4 $10-5/8 $0.28 June 30, 1996 13 10-3/4 0.28 September 30, 1996 13-1/8 12 0.28 December 31, 1996 13-7/8 12-1/2 0.28 Through January 31, 1997 $13-1/2 $12-7/8 $0.28(1) (1) Paid March 15, 1997.
Approximate number of equity security holders: TITLE OF CLASS NUMBER OF RECORD HOLDERS (as of December 31, 1996) Shares of Beneficial Interest, without par value 2,248 15 The Trust estimates that there were over 18,000 beneficial owners of shares, including owners whose shares were held in brokerage and trust accounts. ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- (In thousands, except for per share and share data) OPERATING DATA: Revenues (1)............................ $47,001 $45,605 $42,737 $39,741 $38,165 Income before gains on sales of real estate investments........................... 11,116 10,257 9,911 11,594 11,323 Net income.............................. 12,231 10,304 15,266 11,594 11,323 Funds from operations (2)............... 22,274 21,017 20,084 20,522 20,017 Cash flows from operating activities.... 21,956 20,203 20,212 21,900 15,877 Cash dividends paid..................... 19,102 18,882 18,683 18,531 18,316 PER SHARE DATA: Income before gains on sales of real estate investments.................... $0.65 $0.61 $0.59 $0.70 $0.69 Net income.............................. 0.72 0.61 0.92 0.70 0.69 Cash dividends paid .................... 1.12 1.12 1.12 1.12 1.12 Weighted average number of shares outstanding...............17,055,496 16,861,324 16,682,675 16,548,198 16,356,462 BALANCE SHEET DATA: Real estate properties (3).............. $384,550 $395,800 $389,094 $345,088 $337,703 Total assets............................ 339,629 344,571 347,172 309,345 316,622 Fixed rate debt........................ 111,207 114,609 116,961 67,500 69,429 Bank line of credit balance............. 32,250 29,250 23,645 33,244 35,902 Shareholders' equity.................... 191,948 196,799 202,684 204,938 209,345
(1) Revenues comprise minimum rents, percentage rents, recoveries from tenants and other income. (2) The Trust considers Funds From Operations (FFO) to be an alternate measure of an equity REIT's performance since such measure does not recognize depreciation and amortization of real estate assets as reductions of cash flow from operations. For further discussion of FFO, please refer to Management's Discussion and Analysis on page 17. (3) Real estate properties reflect acquisition costs and capitalized costs of improvements before deduction of depreciation and amortization. Real estate properties do not include properties held for sale. As of December 31, 1996, the Trust owned 10 properties held for sale with an aggregate book value (before depreciation) of $16,161,000. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Trust to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. LIQUIDITY AND CAPITAL RESOURCES The Trust anticipates that cash flows provided by operations will continue to provide adequate funds for all current principal and interest payments as well as dividend payments required to maintain its status as a real estate investment trust under the Internal Revenue Code requirements. Cash on hand, proceeds from the sale of properties held for sale and borrowings under the Trust's existing bank line of credit, as well as other debt and equity alternatives, will be used to provide the necessary funds to achieve future growth. At December 31, 1996, the Trust owned 10 properties held for sale with a net aggregate carrying value of $10.6 million. As of December 31, 1996, the Trust's aggregate outstanding indebtedness of $143.5 million comprised $111.2 million in fixed-rate debt (i.e., $61.3 million of convertible debentures and $49.9 million of senior notes) and $32.3 million of borrowings under the Trust's variable-rate bank line of credit. Any incurrence of additional debt by the Trust would be subject to limitations imposed under the Trust's senior notes and the bank line of credit. The Trust had approximately $12.7 million available under its $45.0 million bank line of credit as of December 31, 1996. This facility, which has certain covenants (including minimum shareholders' equity, maximum ratio of debt to net worth and income coverage requirements), could be used to fund acquisitions, improvements to real estate and other cash requirements. The interest rate on the bank line of credit is either LIBOR plus 1.6% or the participating banks' reference rate, at the Trust's election. The weighted average interest rate on the bank line of credit at December 31, 1996, was 7.25%. The Trust intends to renew or replace this facility when it expires on May 31, 1998. The Trust has an ownership interest in two properties where the co-owner is obligated under a note that is secured by the property. None of the Trust's debt is secured by mortgages on its properties. FUNDS FROM OPERATIONS The Trust considers Funds From Operations to be an alternate measure of an equity REIT's performance since such measure does not recognize depreciation and amortization of real estate assets as reductions of cash flow from operations. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Yet, since real estate values have historically risen or fallen with market conditions, the Trust, along with most industry investors, has considered presentation of operating results for real estate companies that use historical cost accounting to be less than fully informative. 17 The National Association of Real Estate Investment Trusts (NAREIT) defines Funds From Operations as net income plus depreciation and amortization of assets uniquely significant to the real estate industry, reduced by gains and increased by losses on sales of property. Funds From Operations does not represent cash flows from operations as defined by generally accepted accounting principles and should not be considered a substitute for net income as an indicator of the Trust's operating performance, or for cash flows as a measure of liquidity. Funds From Operations (NAREIT 1995 definition) increased $1.3 million to $22.3 million in 1996, from the 1995 figure of $21.0 million. This 6% increase is primarily the result of increased revenues and, to a lesser extent, reduced operating expenses. In 1995, Funds From Operations increased $933,000 to $21.0 million, an increase of more than 4% over the 1994 figure of $20.1 million. The major components of this increase were increased minimum rents, increased recoveries from tenants and the absence of a 1994 provision for environmental costs relating to the Oakland, California, property, offset in part by increased interest expense, property operating costs and a decrease in other income. RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 Net income increased $1.9 million to $12.2 million, or $0.72 per share, in 1996, from $10.3 million, or $0.61 per share, in 1995. This 19% increase in net income is principally due to the 1996 gains of $1.1 million realized from the sale of two single-tenant retail properties and one parcel of land. Additionally, the increase results from increased minimum rents and other income as well as decreased interest expense and other operating expenses. Minimum rents increased $600,000 to $38.2 million in 1996 from $37.6 million in 1995. This increase represents approximately 2% over the 1995 figure. Other income increased $172,000, or 29%, to $756,000 in 1996 from $584,000 in 1995. This increase is primarily the result of the $75,000 gain recorded on the sale of marketable securities held by the Trust and increased lease termination income of $60,000. Interest expense decreased $248,000, or 2%, from the 1995 figure of $11.5 million to $11.3 million in 1996. The main factors contributing to this decrease are: (i) the redemption of $2,250,000 of 8% convertible debentures during the year and (ii) the decreased interest rate on the Trust's variable rate line of credit. Other operating expenses decreased $224,000 to $2.7 million in 1996 from $2.9 million in 1995. This 8% decrease is primarily due to decreased spending for "additional" marketing funds. Additional marketing funds are in excess of the Trust's contractually obligated contributions. Historically, certain shopping centers were targeted to benefit from these additional contributions until the shopping center obtained stabilization. 18 COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994 Net income decreased $5.0 million to $10.3 million, or $0.61 per share, in 1995, from $15.3 million, or $0.92 per share, in 1994. This 33% decrease in net income is principally due to the 1994 gains realized from the sales of real estate investments. Additionally, the decrease is due to increased interest expense, depreciation and amortization, and property operating costs as well as decreased other income, partially offset by the absence of the 1994 provision for loss on real estate investment. Minimum rents increased $3.5 million in 1995 to $37.6 million, a 10% increase over $34.1 million in 1994. This increase resulted from (i) the Trust's seven acquisitions during 1994 and 1995, partially offset by five dispositions in 1994 and (ii) occupancy gains. Recoveries from tenants increased by 12%, or $738,000, to $6.8 million in 1995 as compared to $6.1 million in 1994. This increase is primarily the result of the Trust's seven acquisitions and occupancy gains referred to above. Other income decreased $1.4 million to $584,000 from $2.0 million in 1994. The contributing factors to this decrease are the absence in 1995 of (i) $600,000 of lease termination income recorded in 1994, (ii) investment income earned in 1994 from the senior notes net proceeds prior to the use of these proceeds for several 1994 acquisitions and (iii) mortgage interest income earned on a note retired during the second quarter of 1994. Interest expense increased $1.4 million, or 14%, in 1995 to $11.5 million from $10.1 million in 1994. This increase primarily results from increased borrowings and higher interest rates under the Trust's bank line of credit. Additionally, interest expense increased as a result of 12 months of interest on the senior notes in 1995 compared to 10-1/2 months in 1994. Property operating costs were $8.3 million in 1995 compared to $7.4 million in 1994. This $899,000, or 12% increase from the prior year, is primarily due to the 1994 and 1995 acquisitions. Ownership of the majority of these properties commenced mid-year 1994. Depreciation and amortization expense increased $1.0 million to $10.9 million for the year ended December 31, 1995, from $9.9 million in 1994. This 10% increase results from a net increase in the depreciable basis of the Trust's portfolio of real estate investments due to acquisitions made by the Trust beginning in mid-year 1994, net of dispositions. INFLATION Substantially all of the Trust's properties are leased on a triple-net basis, which reduces the Trust's exposure to increases in property operating expenses resulting from inflation. Future increases in inflation would likely increase revenues and, thereby, further protect the Trust from the impact of inflation. Revenue increases could be realized through CPI-based escalation of rents, percentage rents based on tenants' gross sales and inflation-adjusted base rents on new leases. Increases in interest rates could increase the Trust's borrowing costs. As of December 31, 1996, the Trust had $32.3 million outstanding under its unsecured variable-rate bank line of credit. This amount represents approximately 22% of the Trust's total liabilities and approximately 8% of the Trust's historical cost of real estate owned. 19 WESTERN INVESTMENT REAL ESTATE TRUST Financial Statements Form 10-K Item 8 December 31, 1996 20 WESTERN INVESTMENT REAL ESTATE TRUST INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants 22 Balance Sheets - December 31, 1996 and December 31, 1995 23 Statements of Income - For the Years Ended 24 December 31, 1996, 1995 and 1994 Statements of Shareholders' Equity - For the Years Ended 25 December 31, 1996, 1995 and 1994 Statements of Cash Flows - For the Years Ended 26 December 31, 1996, 1995 and 1994 Notes to Financial Statements 27 to 37 Financial Statement Schedule III: Real Estate and 38 to 39 Accumulated Depreciation 21 Report of Independent Certified Public Accountants To the Trustees and Shareholders Western Investment Real Estate Trust: We have audited the financial statements of Western Investment Real Estate Trust (a California real estate investment trust) as listed in the accompanying index. In connection with our audit of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Investment Real Estate Trust as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP San Francisco, California February 4, 1997 22
BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST December 31, ASSETS 1996 1995 -------------------------------------- (In thousands) Real estate investments: Real estate properties.......................................... $384,550 $395,800 Less accumulated depreciation and amortization.................. (66,271) (61,249) -------- -------- 318,279 334,551 Real estate properties held for sale, (net of accumulated depreciation of $5,525,000 in 1996) 10,636 --- -------- -------- Net real estate investments.................................. 328,915 334,551 Cash and cash equivalents.......................................... 952 657 Accounts receivable and other assets............................... 7,551 6,868 Deferred long-term debt issuance costs, net........................ 2,211 2,495 -------- -------- $339,629 $344,571 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Bank line of credit................................................ $32,250 $29,250 Convertible debentures............................................. 61,310 63,433 Senior notes, net.................................................. 49,897 49,882 Real estate loan payable........................................... --- 1,294 -------- -------- 143,457 143,859 Interest payable................................................... 1,477 1,641 Prepaid rents and security deposits................................ 1,554 1,320 Other liabilities.................................................. 1,193 952 -------- -------- Total liabilities............................................... 147,681 147,772 -------- -------- Shareholders' equity: Shares of beneficial interest, no par value, unlimited share authorization. Issued and outstanding: December 31, 1996 - 17,138,432 shares; December 31, 1995 - 16,972,496 shares........................ 242,054 240,034 Accumulated dividends in excess of net income................... (50,106) (43,235) -------- -------- Commitments and contingencies (notes 3, 11 and 16) Total shareholders' equity...................................... 191,948 196,799 -------- -------- $339,629 $344,571 -------- -------- -------- -------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23 STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST - --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 ------------------------------------------------------ (In thousands, except for per share and share data) REVENUES: Minimum rents $38,241 $37,641 $34,100 Percentage rents 649 559 537 Recoveries from tenants 7,355 6,821 6,083 Other income 756 584 2,017 ---------- ---------- ---------- Total revenues 47,001 45,605 42,737 ---------- ---------- ---------- EXPENSES: Interest 11,289 11,537 10,063 Property operating costs 8,933 8,310 7,411 Depreciation and amortization 11,264 10,893 9,879 Other operating expenses 2,693 2,917 2,967 General and administrative 1,706 1,691 1,510 ---------- ---------- ---------- Total expenses 35,885 35,348 31,830 ---------- ---------- ---------- Income from operations 11,116 10,257 10,907 ---------- ---------- ---------- Provision for loss on real estate investment --- --- 996 ---------- ---------- ---------- Income before gains on sales of real estate investments 11,116 10,257 9,911 Gains on sales of real estate investments 1,115 47 5,355 ---------- ---------- ---------- - - Net income $12,231 $10,304 $15,266 ---------- ---------- ---------- ---------- ---------- ---------- Per share data: Income before gains on sales of real estate investments $0.65 $0.61 $0.59 ---------- ---------- ---------- ---------- ---------- ---------- Net income $0.72 $0.61 $0.92 ---------- ---------- ---------- ---------- ---------- ---------- Cash dividends paid $1.12 $1.12 $1.12 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares outstanding 17,055,496 16,861,324 16,682,675 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 24 STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST Years Ended December 31, 1996, 1995 and 1994 (In thousands, except share data)
Accumulated Dividends Total Shares of in Excess of Share- Beneficial Interest Net holders' -------------------- Number Amount Income Equity ------ ------ ------ ------- Balance, January 1, 1994 16,645,791 $236,178 $(31,240) $204,938 Net proceeds from issuance of shares 63,740 834 --- 834 Debenture redemptions 25,001 329 --- 329 Net income --- --- 15,266 15,266 Cash dividends paid --- --- (18,683) (18,683) ---------- -------- -------- -------- Balance, December 31, 1994 16,734,532 237,341 (34,657) 202,684 Net proceeds from issuance of shares 43,575 514 --- 514 Debenture redemptions 194,389 2,179 --- 2,179 Net income --- --- 10,304 10,304 Cash dividends paid --- --- (18,882) (18,882) ---------- -------- -------- -------- Balance, December 31, 1995 16,972,496 240,034 (43,235) 196,799 Debenture redemptions 165,936 2,020 --- 2,020 Net income --- --- 12,231 12,231 Cash dividends paid --- --- (19,102) (19,102) ---------- -------- -------- -------- BALANCE, DECEMBER 31, 1996 17,138,432 $242,054 $(50,106) $191,948 ---------- -------- -------- -------- ---------- -------- -------- --------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 25 STATEMENTS OF CASH FLOW WESTERN INVESTMENT REAL ESTATE TRUST - ----------------------- ------------------------------------
Year Ended December 31, 1996 1995 1994 -------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,231 $ 10,304 $ 15,266 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . 11,264 10,893 9,879 Amortization of deferred debt issuance costs. . . . . . . . . . . . 365 391 319 Gains on sales of real estate investments . . . . . . . . . . . . . (1,115) (47) (5,355) Gain on sale of marketable securities . . . . . . . . . . . . . . . (75) --- --- Increase in accounts receivable and other assets. . . . . . . . . . (204) (304) (558) Increase in deferred rent receivable. . . . . . . . . . . . . . . . (797) (1,065) (692) (Decrease) increase in interest payable . . . . . . . . . . . . . . (164) 144 175 Increase (decrease) in prepaid rents, security deposits and other liabilities. . . . . . . . . . . . . 451 (113) 182 Provision for loss on real estate investment. . . . . . . . . . . . -- --- 996 --------- --------- -------- Net cash provided by operating activities . . . . . . . . . . . . . 21,956 20,203 20,212 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of real estate investments . . . . . . . . . . . . 1,371 168 24,470 Proceeds from sale of marketable securities. . . . . . . . . . . . . . 234 --- --- Recovery of acquisition costs (acquisitions) of real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (3,278) (64,907) Funds escrowed pending acquisition . . . . . . . . . . . . . . . . . . --- (168) --- Improvements of real estate investments: Build-to-suit developments. . . . . . . . . . . . . . . . . . . . . (4,239) (1,056) (1,325) New leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,707) (2,544) (1,945) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (192) (676) (1,031) Recovery of investment in direct financing leases... . . . . . . . . . 272 236 205 Proceeds from payoff of mortgage loan receivable . . . . . . . . . . . --- --- 2,809 --------- --------- -------- Net cash used in investing activities . . . . . . . . . . . . . . . (4,225) (7,318) (41,724) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances on bank line of credit. . . . . . . . . . . . . . . . . . . . 40,468 39,650 46,856 Principal payments on bank line of credit. . . . . . . . . . . . . . . (37,468) (34,045) (56,455) Principal payments on real estate loan payable . . . . . . . . . . . . (1,294) (68) (62) Redemption of convertible debentures . . . . . . . . . . . . . . . . . (40) (45) (4) Net proceeds from issuance of shares . . . . . . . . . . . . . . . . . --- 514 834 Proceeds from senior notes offering. . . . . . . . . . . . . . . . . . --- --- 49,855 Senior notes issuance costs. . . . . . . . . . . . . . . . . . . . . . --- --- (509) Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . (19,102) (18,882) (18,683) --------- --------- -------- Net cash (used in) provided by financing activities . . . . . . . . (17,436) (12,876) 21,832 --------- --------- -------- Net increase in cash and cash equivalents . . . . . . . . . . . . . 295 9 320 Cash and cash equivalents, at beginning of period . . . . . . . . . . . . $ 657 $ 648 $ 328 --------- --------- -------- Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . $ 952 $ 657 $ 648 --------- --------- -------- --------- --------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest. . . . . . . . . . . . . . . $ 11,217 $ 11,030 $ 9,568 --------- --------- -------- --------- --------- -------- SUPPLEMENTAL NON-CASH OPERATING ACTIVITY: Property buyer's assumption of liability. . . . . . . . . . . . . . $ --- $ --- $ 658 --------- --------- -------- --------- --------- --------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 26 NOTES TO FINANCIAL STATEMENTS Note 1: SIGNIFICANT ACCOUNTING POLICIES (A) Description of Business Western Investment Real Estate Trust, an equity real estate investment trust (REIT), is a dominant owner of community and neighborhood shopping centers located in Northern California and Northern Nevada. At December 31, 1996, the company's real estate portfolio comprises 60 properties, 48 of which are retail properties. The majority of Western's retail properties are anchored by grocery superstores. Western, a self-administered and fully integrated real estate operating company, owns and manages quality properties that offer opportunities for growth in cash flow. (B) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (C) Real Estate Investments Properties comprising real estate investments are stated at cost plus capitalized improvements. Depreciation and amortization are calculated primarily using the straight-line method over the estimated useful lives of 20-45 years for buildings and 2-31 years for improvements. Included in real estate investments are net investments in direct financing leases comprising the aggregate minimum lease payments to be received over the terms of the leases, plus an estimated residual value, less unearned income. In addition, leasing commissions and leasing-related legal fees are capitalized and amortized over the respective terms of these leases. Leasing commissions and leasing-related legal fees are included under "Accounts receivable and other assets." The Trust adopted Financial Accounting Standards Board Statement (FAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective January 1, 1996. Accordingly, in the normal course of the Trust's business, when it determines that a property should be disposed of, the Trust will discontinue the periodic depreciation of that property. 27 Additionally, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the recoverability of the carrying value of that property is evaluated. If the sum of the undiscounted, expected future cash flows, exclusive of interest, is less than the carrying value of that asset, a determination of fair market value of that asset is made. If the fair market value is less than the carrying value of that asset, an impairment charge is recognized. (D) Rental Income The Trust accrues base rental income (minimum contractual lease payments) as earned. Certain of the Trust's leases provide for additional rent based on specified percentages of the lessee's revenues. Such percentage-based rental income is recognized during the year based on estimates. The Trust recognizes income from deferred rental receivables in accordance with Financial Accounting Standards Board Statement (FAS) 13, "Accounting for Leases." Deferred rent receivable recognized as income was $797,000 in 1996, $1,065,000 in 1995 and $692,000 in 1994. Unearned income on leases accounted for as direct financing leases - representing the difference between the minimum lease payments and estimated residual value, less the costs of the leased property - is recognized over the life of the lease using the interest rate implicit in the lease, which provides a level rate of return on the net investment in the property. (E) Cash and Cash Equivalents Cash equivalents comprise certain highly liquid investments with original maturities of less than three months. (F) Deferred Long-Term Debt Issuance Costs The costs incurred in connection with the issuance of debt are amortized over the term of the debt instruments. (G) Earnings Per Share Earnings per share have been computed using the weighted average number of shares outstanding during each year. Exercise of the outstanding stock options would not have a material dilutive effect on earnings per share. Note 2: REAL ESTATE INVESTMENTS The following is a reconciliation of real estate properties, the related accumulated depreciation and amortization, and properties held for sale: 28
Year Ended December 31, ----------------------- 1996 1995 1994 ------------------------------------------------------- (In thousands) Real estate properties: Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . $ 395,800 $ 389,094 $ 345,088 Increases: Acquisitions. . . . . . . . . . . . . . . . . . . . --- 3,278 64,907 Improvements. . . . . . . . . . . . . . . . . . . . 5,788 3,775 3,842 Decreases: Properties reclassified as held for sale. . . . . . (16,161) ------ Dispositions. . . . . . . . . . . . . . . . . . . . (569) (111) (24,075) Recovery of acquisition costs . . . . . . . . . . . (36) --- --- Write-down due to impairment. . . . . . . . . . . . --- --- (463) Amortization of direct financing leases . . . . . . (272) (236) (205) --------- --------- --------- Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . $384,550 $ 395,800 $ 389,094 --------- --------- --------- --------- --------- --------- Accumulated depreciation and amortization: Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . $ 61,249 $ 50,802 $ 45,635 Additions charged to operations . . . . . . . . . . . . . . . . . . . 10,722 10,447 9,469 Accumulated depreciation of properties held for sale. . . . . . . . . (5,525) --- --- Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (175) --- (4,302) --------- --------- --------- Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . $ 66,271 $ 61,249 $ 50,802 --------- --------- --------- --------- --------- --------- Real estate properties held for sale: Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . $ (0) $ (0) $ (0) Properties reclassified as held for sale. . . . . . . . . . . . . . . 16,161 --- --- Accumulated depreciation of properties held for sale. . . . . . . . . (5,525) --- --- --------- --------- --------- Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . $ 10,636 $ (0) $ (0) --------- --------- --------- --------- --------- ---------
At December 31, 1996, the Trust owned 10 properties held for sale. These properties total 290,000 leasable square feet and have a net aggregate carrying value of $10.6 million. With the exception of the Trust's ownership interest in two properties in which the co-owner is obligated under a note secured by the property, no other Trust property is subject to mortgage debt. Most of the Trust's leases require the tenant to be responsible for, or reimburse the Trust for liability insurance coverage on the properties. The Trust maintains umbrella liability insurance on all of its properties and monitors tenant compliance with liability insurance coverage requirements. While the Trust believes its properties are adequately insured, the Trust does not carry earthquake, flood or pollution coverage. However, most major anchor tenants are required to rebuild or repair their leased premises if damaged or destroyed, regardless of the cause. Most of the Trust's properties are located in areas of California and Nevada where earthquakes have been known to occur. In the event of a major earthquake, Trust properties could suffer substantial damage or destruction. Since it commenced real estate operations in 1964, the Trust has not incurred any material expense nor, to its knowledge, have any of its properties incurred any material damage from earthquakes or floods. 29 The Trust periodically considers the merits of purchasing earthquake insurance. To date the Trust has not purchased earthquake insurance because of (i) the high premiums and deductibles and (ii) the Trust's geographically diversified portfolio that reduces the likelihood of material loss as a consequence of earthquakes. Furthermore, the majority of properties in the portfolio principally comprise single-story, relatively new buildings. Note 3: CAPITAL EXPENDITURES It is the Trust's practice to capitalize costs that exceed $4,000 and are associated with the improvement of real estate investments. Capitalized costs include leasing-related costs and property improvements. During 1996, the Trust capitalized $6,138,000 in such expenditures (of which $5,788,000 relates to improvements and $350,000 to leasing-related costs). This amount comprises $4,239,000 of build-to-suit capital improvements; $169,000 of capitalized costs incurred in connection with the leasing of previously unleased space; $1,538,000 of capitalized costs incurred in connection with leasing previously leased space; and $192,000 of capitalized costs that relate to general improvements. During the year ended December 31, 1996, the Trust entered into new leases that obligate the Trust to fund leasing commissions, tenant improvements and build-to-suit developments. This obligation relates entirely to new leases, a portion of which was funded during 1996 and is reflected in the preceding paragraph. In addition, a portion remains an obligation of the Trust at December 31, 1996. The aggregate and per-square-foot information is as follows:
Property Type New Leases - -------------------------------------------------------------------------------------------------------------------- Tenant Leasing Build to Suit Improvements Commissions -------------------------- ---------------------- ---------------------------- Per Per Per Aggregate Square Aggregate Square Aggregate Square Amount Foot Amount Foot Amount Foot --------- ------ --------- ------ ---------- ------ Shopping Centers & Retail Properties $811,000 $67.58 $1,024,585 $6.91 $265,251 $4.77 Commercial 99,080 8.00 27,179 2.19 Total $811,000 $1,123,665 $292,430
Note 4: LEASES Future minimum lease payments scheduled to be received under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1996, are as follows: 1997 -- $36,820,000; 1998 -- $34,864,000; 1999 -- $31,877,000; 2000 -- $29,191,000; 2001 -- $25,974,000; thereafter -- $233,850,000. The total minimum lease payments are $392,576,000. 30 Future minimum lease payments scheduled to be received under direct financing leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1996, are as follows: 1997 -- $469,000; 1998 -- $469,000; 1999 -- $212,000; 2000 -- $189,000; 2001 -- $189,000; thereafter -- $331,000. At December 31, 1996, the Trust's investment in direct financing leases was $1,797,000, and was calculated by adding the estimated residual value of $383,000 to the total remaining minimum lease payments of $1,859,000, less unearned income of $445,000. The original cost of the properties subject to these direct financing leases is $4,449,000. Included in other income is income recorded under direct financing leases of $197,000, $233,000 and $265,000 in 1996, 1995 and 1994, respectively. Note 5: MAJOR TENANT Total revenues attributable to leases with Raley's, a grocery and drug retailer, the Trust's most significant tenant, were $9,382,000, $9,009,000 and $9,400,000 in 1996, 1995 and 1994, respectively. These amounts represented 20%, 20% and 22% of total revenues during 1996, 1995 and 1994, respectively. Note 6: BANK LINE OF CREDIT At December 31, 1996, the Trust had borrowed $32,250,000 under a $45 million unsecured line of credit. Interest on funds drawn under this line of credit is either LIBOR plus 1.6% or the participating banks' reference rate, at the Trust's election, and is payable monthly on any outstanding balance. In addition, the Trust pays an annual fee of $112,500. At December 31, 1996, and 1995, the weighted average interest rate on the outstanding balance under the Trust's bank line of credit was 7.25% and 7.57%, respectively. During the years ended December 31, 1996, and 1995, the average balance outstanding on the bank line of credit was $27,503,000 and $24,187,000, respectively. The weighted average interest rate during the year was 7.33% for 1996 and 7.91% for 1995. The Trust is not required to pledge any assets or maintain compensating balances for this line of credit, although the Trust has agreed to certain covenants that impose limitations on the incurrence of debt and other restrictions. Additionally, if amounts due under the line of credit are not paid at maturity, the lender, at its option, can require the Trust to provide security interests in Trust properties. The Trust intends to renew or replace this facility when it expires on May 31, 1998. Note 7: CONVERTIBLE DEBENTURES In August 1988, the Trust issued $75 million of 8% convertible debentures (the "debentures"), due in 2008. The debentures are convertible prior to maturity, unless previously redeemed, at a conversion price equal to $22.23 per share. The debentures are subject to limited mandatory redemption at 100% of their principal amount plus accrued interest (i) on June 30 in any year, with the consent of any holder thereof, or (ii) at any time within 60 days after the receipt of a consent on behalf of a deceased holder. The Trust has the option either to redeem debentures for cash or to exchange its shares in an amount equal to 100% of the principal amount of such debentures. Such redemption obligations are limited to a noncumulative maximum principal amount of $25,000 per holder and $2,250,000 in the aggregate for each 12 month period ending June 30, with priority being given to consents on behalf of deceased holders. In addition, the Trust has the option to redeem the debentures without the consent of the holders, in whole or in part, at a redemption price of par. 31 On June 30, 1996, $2,029,000 of the debentures were presented for limited mandatory redemption. The Trust elected to exchange 161,603 shares at $12.55 for the debentures. During 1996, an additional $94,000 of debentures were presented for mandatory redemption on behalf of deceased debenture holders, and the Trust elected to exchange (i) $54,000 for 4,333 shares and (ii) $40,000 in cash. On June 30, 1995, $1,827,000 of the debentures were presented for limited mandatory redemption. The Trust elected to exchange 158,785 shares at $11.50 for the debentures. During 1995, an additional $471,000 of debentures were presented for mandatory redemption on behalf of deceased debenture holders, and the Trust elected to exchange (i) $426,000 for 35,604 shares and (ii) $45,000 in cash. As of December 31, 1996, the debentures carried "investment grade" ratings from Moody's Investor Service (Baa(3)) and Standard & Poor's (BBB). Note 8: SENIOR NOTES In February 1994, the Trust sold $50 million of 7 7/8% senior notes (the "notes") in a public offering. The notes are due in 2004 and contain certain covenants that impose limitations on the incurrence of debt and other restrictions. These restrictions include a cap on total borrowings, minimum shareholders' equity and income coverage requirements. The notes are not redeemable prior to maturity. As of December 31, 1996, the senior notes carried "investment grade" ratings from Moody's Investor Service (Baa(3)) and Standard & Poor's (BBB). Note 9: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments. The Trust believes that the carrying amount approximates fair value for cash and cash equivalents, the bank line of credit and real estate loan payable. The fair value of the Trust's marketable securities, convertible debentures and senior notes are based on quoted market prices. The estimated fair values of the Trust's financial instruments as of December 31 are as follows (in thousands):
1996 1995 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------- ----------------------------------- Cash and cash equivalents $ 952 $ 952 $ 657 $ 657 Marketable securities . . . . . . . . --- --- 159 199 Bank line of credit . . . . . . . . . $32,250 $32,250 $29,250 $29,250 Convertible debentures. . . . . . . . 61,310 61,310 63,433 62,164 Senior notes. . . . . . . . . . . . . 49,897 50,938 49,882 54,015 Real estate loan payable. . . . . . . --- --- 1,294 1,294
32 Note 10: TRUSTEE EMERITUS, DEATH AND DISABILITY PROGRAMS Under the Trustee Emeritus Program, O. A. Talmage, Bernard Etcheverry, and Chester R. MacPhee, Jr. are eligible to become a Trustee Emeritus after reaching age 65. A Trustee Emeritus shall serve the Trust in an advisory capacity and will be compensated accordingly, up to a maximum of $60,000 annually. Mr. Etcheverry elected to become Trustee Emeritus on January 1, 1993. O. A. Talmage, Bernard Etcheverry, and Chester R. MacPhee, Jr. are eligible to participate in the Death and Disability Program. The Trust will pay an annual death or disability obligation under the program based on a percentage of the participant's average annual compensation for his 36 months of service as a trustee during the time his compensation was the greatest up to a maximum of $60,000 annually. In the case of a participant's death, his eligible spouse will be entitled to receive benefits under the program. The Death and Disability obligation as of December 31, 1996, and 1995 was $409,000 and $346,000 respectively, and was calculated using a discount rate of 7.0% and 8.5% for 1996 and 1995, respectively. Note 11: STOCK OPTION PLAN In May 1988, the Trust instituted a non-qualified stock option plan (the "Plan"). The purchase price of shares of beneficial interest purchased pursuant to this Plan is to be not less than the fair market value of the shares on the date of grant. Options granted under the Plan, which expire six years from the grant date if not exercised, vest and become exercisable at a rate of 20% per year from the date of grant until completely vested. A total of 300,000 shares of beneficial interest have been authorized under the Plan. Activity in the Trust's share option plan during the three years ended December 31, 1996, is summarized in the following table:
Shares Available Options Weighted for Future Granted and Average Options Grants Outstanding Exercise Price - ----------------------------------------------------------------------------------------------------------------------------- 12/31/93, Balance 2,400 297,600 $15.70 - ----------------------------------------------------------------------------------------------------------------------------- Exercised -- (160) $11.44 Expired 143,240 (143,240) $17.37 Granted (106,800) 106,800 $12.68 - ----------------------------------------------------------------------------------------------------------------------------- 12/31/94, Balance 38,840 261,000 $13.54 - ----------------------------------------------------------------------------------------------------------------------------- Exercised --- --- --- Expired 45,000 (45,000) $17.07 Granted (33,000) 33,000 $11.00 - ----------------------------------------------------------------------------------------------------------------------------- 12/31/95, Balance 50,840 249,000 $12.57 - ----------------------------------------------------------------------------------------------------------------------------- Exercised --- --- --- Expired 6,000 (6,000) $11.66 Granted (29,000) 29,000 $13.31 - ----------------------------------------------------------------------------------------------------------------------------- 12/31/96, BALANCE 27,840 272,000 $12.67 - -----------------------------------------------------------------------------------------------------------------------------
33 The following table summarizes information about the Trust's fixed price stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ---------------------------------------------------------------------- ------------------------------------- Number of Weighted Weighted Weighted options average average average Range of outstanding at remaining exercise exercise Exercise Prices December 31, 1996 contractual life price Options price - -------------------------------------------------------------------------------------------------------------------- $11.00 - $13.81 272,000 3.44 years $12.67 130,160 $12.60
Accounting for Stock-Based Compensation On January 1, 1996, the Trust adopted Financial Accounting Standards Board Statement (FAS) 123, "Accounting for Stock-Based Compensation," and has elected the disclosure provisions of FAS 123. Consequently, the Trust has recorded no compensation costs related to its stock options granted during 1996, 1995 and 1994. Pursuant to FAS 123, the Trust is required to disclose the pro-forma effects on net income and net income per-share data as if the Trust had elected to use the fair value approach to account for its employee stock-based compensation plans.
YEAR ENDED Year ended (In thousands, except for per share data) DECEMBER 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------------ As Adjusted As Adjusted Reported Pro-Forma Reported Pro-Forma ------------------------------------------------------------------------- Net Income $12,231 $12,214 $10,304 $10,302 Net Income, Per Share $0.72 $0.72 $0.61 $0.61
The weighted average fair value per option granted during the year ended December 31, 1996, and 1995, was $1.69 and $1.11, respectively. The fair value of options granted was estimated on the date of grant. The following assumptions were used for the options granted in 1996 and 1995, respectively: risk-free interest rate of 6.05% and 5.80%; forfeiture rate, 7.4% and 6.2%; share- volatility rate, 21.9% and 22.7%; and dividend yield 8.37% and 10.30%. Note 12: DIVIDEND REINVESTMENT PLAN In accordance with the Dividend Reinvestment and Share Purchase Plan adopted by the Trust in 1990, the Trust received $706,000 in dividend reinvestment proceeds during 1996. These proceeds were used to purchase shares in the open market for the shareholders. During 1995, the Trust received $514,000 net of issuance costs and issued 43,575 shares of beneficial interest. Additionally, $184,000 in dividend reinvestment proceeds were used to purchase shares in the open market for the shareholders in 1995. During 1994, the Trust received $832,000 net of issuance costs and issued 63,580 shares of beneficial interest. 34 Note 13: QUARTERLY RESULTS OF OPERATIONS The following is a summary of quarterly financial information for the last two years:
Unaudited Quarters -------------------------------------------------------------------------- (In thousands, except for per share and share data) First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------------- 1996 - ---- TOTAL REVENUES . . . . . . . . . . . . . . . . $ 11,171 $ 12,026 $ 11,727 $ 12,077 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- INCOME BEFORE GAINS ON SALES OF REAL ESTATE INVESTMENTS. . . . . . . . . . . . . $ 2,816 $ 2,837 $ 2,711 $ 2,752 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME . . . . . . . . . . . . . . . . . . $ 2,816 $ 3,869 $ 2,794 $ 2,752 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE: NET INCOME. . . . . . . . . . . . . . . . . $ 0.17 $0.23 $0.16 $ 0.16 DIVIDENDS . . . . . . . . . . . . . . . . . $ 0.28 $0.28 $0.28 $ 0.28 WEIGHTED AVERAGE NUMBER OF SHARES. . . . . . . 16,972,496 16,972,496 17,136,774 17,138,432 1995 Total revenues . . . . . . . . . . . . . . . . $ 10,490 $ 11,589 $ 10,989 $ 12,537 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before gains on sales of real estate investments. . . . . . . . . . . . . $ 2,161 $ 2,430 $ 2,725 $ 2,941 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income . . . . . . . . . . . . . . . . . . $ 2,161 $ 2,430 $ 2,772 $ 2,941 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Per share: Net income. . . . . . . . . . . . . . . . . $ 0.13 $ 0.15 $ 0.16 $ 0.17 Dividends . . . . . . . . . . . . . . . . . $ 0.28 $ 0.28 $ 0.28 $ 0.28 Weighted average number of shares. . . . . . . 16,742,965 16,771,742 16,955,262 16,971,879
Note 14: FUNDS FROM OPERATIONS The Trust's calculation of Funds From Operations pursuant to the 1995 NAREIT definition for the year ended December 31, 1996, 1995 and 1994, respectively, is as follows:
Year Ended December 31 -------------------------------------------------- (In thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,231 $10,304 $15,266 Less: Gains on sales of real estate investments. . . . . . . . . . . (1,115) (47) (4,892) Plus: Real property depreciation . . . . . . . . . . . . . . . . . . 9,886 9,817 9,031 Amortization of tenant improvement costs . . . . . . . . . . . 836 631 439 Amortization of leasing commission costs . . . . . . . . . . . 436 312 240 ------- ------- ------- Funds From Operations, 1995 Definition (1) . . . . . . . . . . . . . . $22,274 $21,017 $20,084 ------- ------- ------- ------- ------- -------
(1) The Trust considers Funds From Operations (FFO) to be an alternate measure of an equity REIT's performance since such measure does not recognize depreciation and amortization of real estate assets as reductions of cash flow from operations. For further discussion of FFO, please refer to Management's Discussion and Analysis on page 17. 35 Note 15: INCOME TAX STATUS OF TRUST The Trust has elected to be taxed as a real estate investment trust under the applicable provisions of the Internal Revenue Code and the comparable California statutes. Under such provisions, the Trust will not be taxed on that portion of its taxable income currently distributed to shareholders, provided that at least 95% of its real estate investment trust taxable income is distributed. Management believes that the Trust has qualified, and will continue to qualify, for tax purposes as a real estate investment trust. As the Trust intends to distribute all of its taxable income concurrently, no provision has been made for federal or state income taxes. Federal taxable income of the Trust prior to the dividend-paid deductions for the three years ended December 31, was: 1996 -- $16,692,000; 1995 -- $12,727,000 and 1994 -- $15,129,000. The difference between net income for financial reporting purposes and taxable income results primarily from different methods of accounting for leases, depreciation of investment properties and gains on property dispositions. The taxable and nontaxable portions of distributions to shareholders for federal income tax purposes in 1996, 1995, and 1994 are as follows: 1996 1995 1994 ---------------------------------------- Ordinary income 80.2% 67.1% 72.1% Return of capital 12.6 32.6 19.0 Long-term capital gains 7.2 0.3 8.9 ---------------------------------------- Total 100.0% 100.0% 100.0% ---------------------------------------- ---------------------------------------- Note 16: COMMITMENTS AND CONTINGENCIES The Trust identifies and evaluates prospective investments on a continuous basis. In connection therewith, the Trust initiates letters of interest and extends offers on a regular basis. At December 31, 1996, the Trust was not committed to fund any acquisition. As of December 31, 1996, the Trust has entered into several new leases that call for approximately $1,426,000 in future real estate improvements and leasing commissions. The Trust expects to pay these expenditures from operating cash flows or from borrowings under the bank line of credit. The Trust is routinely involved in various legal actions arising in the normal course of business. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that such outcomes will not have a material adverse effect on the Trust's financial statements. Investments in real property create a potential for environmental liability on the part of the owner of such real property. If hazardous substances are discovered on or emanating from any of the Trust's properties, the Trust and/or others may be held strictly liable for all costs and liabilities relating to the clean-up of such hazardous substances. The Trust carries no express insurance coverage for this type of environmental risk. 36 The Trust assesses on an ongoing basis measures necessary to comply with environmental laws and regulations. In conducting its assessments, the Trust has identified the following matters: OAKLAND, CALIFORNIA During 1994, the Trust concluded the sale of its industrial property in Oakland, California. In accordance with the terms of the sale agreements, under certain conditions, the Trust would be responsible for a portion of the environmental clean-up costs. During January 1997, Alameda County gave notice that the environmental issues pertaining to this site were closed and no further action would be necessary. VALLEJO, CALIFORNIA The restoration work related to the disturbance of wetlands at the Trust's Park Place Shopping Center in Vallejo, California, is currently underway. It is the Trust's current estimate that the remaining cost of this restoration could be as much as $100,000. UNDERGROUND STORAGE TANKS The Trust, as far as it is aware, owns only one property that presently contains underground storage tanks. The Trust has no knowledge of any leakage or contamination resulting from these tanks that will have a material impact on its financial position or results of operations. However, there is a potential for contamination from reported off-site leaking petroleum underground storage tanks located on properties adjacent to certain Trust properties. There is reported soil contamination from underground storage tanks that were removed from the Heritage Place Shopping Center in Tulare, California, prior to its acquisition by the Trust. Tulare County environmental officials ordered the prior owner to clean up this soil contamination. Should the prior owner fail to complete remediation, the Trust's exposure could be as much as $50,000 per the current estimate by an environmental consultant. The probable overall costs of these measures cannot be determined at this time because of uncertainty about the extent of environmental risks and the Trust's responsibility, the complexity of environmental laws and regulations, and the selection of alternative compliance approaches. However, the Trust is not aware of any environmental conditions that it believes will have a material impact on its financial position or results of operations. 37 Western Investment Real Estate Trust Schedule III - Real Estate and Accumulated Depreciation December 31, 1996 (In thousands except for dates of construction and acquisition and depreciable lives)
- ---------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D - ---------------------------------------------------------------------------------------------------------------------------------- Cost capitalized/(sold) Initial cost to company subsequent to acquisition - ---------------------------------------------------------------------------------------------------------------------------------- Buildings and Property Name Encumbrances Land Improvements Land Improvements - ---------------------------------------------------------------------------------------------------------------------------------- Shopping Center/Retail - ---------------------- Luckys, El Cerrito, CA (3) $250 $450 $0 $625 San Antonio Center, Mountain View, CA (3) 310 534 0 4,553 Kmart, Napa, CA Luckys, Santa Maria, CA (3) 77 273 0 164 Carpeteria, Concord, CA (3) 794 249 0 146 Acapulco Y Los Arcos, Fresno, CA (3) 163 382 0 0 Serra Center, Colma, CA (30% interest)(1) 433 914 0 50 Dodge Center, Fallon, NV (3) 405 1,595 0 32 West Town, Winnemuca, NV 130 3,386 0 0 Nob Hill General Stores, Watsonville, CA 416 1,084 0 0 Eastridge Plaza Shopping Center, Porterville, CA 939 4,390 0 54 Angel's Camp Town Center, Angels Camp, CA 580 4,447 0 129 Heritage Place Shopping Center, Tulare, CA 1,427 7,117 0 241 Raley's Shopping Center, Yuba City, CA 2,101 5,151 0 1,157 Canal Farms Shopping Center, Los Banos, CA 1,180 6,904 0 505 Kmart Center, Sacramento, CA 1,875 3,116 0 532 Park Place Shopping Center, Vallejo, CA 3,850 11,291 109 997 Blossom Valley Plaza, Turlock, CA 2,448 8,315 0 392 Coalinga Shopping Center, Coalinga, CA 816 2,144 0 886 Commonwealth Square Shopping Center, Folsom, CA 3,312 13,022 0 130 Country Gables Shopping Center, Granite Bay, CA 2,704 12,684 0 404 Heritage Oak Shopping Center, Gridley, CA 1,603 3,597 0 93 Belle Mill Landing, Red Bluff, CA 2,247 6,043 0 1,813 Anderson Square, Anderson, CA 1,145 2,125 0 356 North Hills Shopping Center, Reno, NV 1,700 6,911 0 62 North Hills (Phase II) 3,706 Cobblestone Shopping Center, Redding, CA 2,375 7,969 0 166 Victorian Walk Shopping Center, Fresno, CA 1,120 7,356 0 199 Elko Junction Shopping Center, Elko, CA 580 7,631 0 533 Elko Junction (Phase II) 1,936 (184) 4,607 Skypark Plaza Shopping Center, Chico, CA 2,854 10,454 0 1,430 Heritage Park Shopping Center, Suisun, CA 3,575 12,187 0 278 Pinecreek Shopping Center, Grass Valley, CA (50% interest)(2) 2,725 7,966 0 111 Eagle Station Shopping Center, Carson City, NV 1,735 7,585 0 152 Currier Square Shopping Center, Oroville, CA 2,025 7,203 0 739 Yreka Junction, Yreka, CA 1,350 5,846 0 445 Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,119 0 327 Raley's Supermarket, Fallon, NV 1,000 3,220 0 0 Caughlin Ranch Shopping Center, Reno, NV 2,950 7,123 0 335 Mercantile Row Shopping Center, Dinuba, CA 1,440 6,208 0 61 Elverta Crossing Shopping Center, Sacramento, CA 3,370 7,477 0 639 Centennial Plaza Shopping Center, Hanford, CA 2,225 8,935 0 78 Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,194 0 (9) - ---------------------------------------------------------------------------------------------------------------------------------- Column A Column E - ---------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period. - ---------------------------------------------------------------------------------------------------------------------------------- Properties Operating under Direct Buildings and Financing Property Name Land Improvements Leases Total - ---------------------------------------------------------------------------------------------------------------------------------- Shopping Center/Retail - ---------------------- Luckys, El Cerrito, CA (3) $250 $1,075 $1,325 San Antonio Center, Mountain View, CA (3) 310 5,087 5,397 Kmart, Napa, CA 0 600 600 Luckys, Santa Maria, CA (3) 77 437 514 Carpeteria, Concord, CA (3) 794 395 1,189 Acapulco Y Los Arcos, Fresno, CA (3) 163 382 545 Serra Center, Colma, CA (30% interest)(1) 433 964 1,397 Dodge Center, Fallon, NV (3) 405 1,627 2,032 West Town, Winnemuca, NV 130 3,386 3,516 Nob Hill General Stores, Watsonville, CA 416 1,084 1,500 Eastridge Plaza Shopping Center, Porterville, CA 939 4,444 5,383 Angel's Camp Town Center, Angels Camp, CA 580 4,576 5,156 Heritage Place Shopping Center, Tulare, CA 1,427 7,358 8,785 Raley's Shopping Center, Yuba City, CA 2,101 6,308 8,409 Canal Farms Shopping Center, Los Banos, CA 1,180 7,409 8,589 Kmart Center, Sacramento, CA 1,875 3,648 5,523 Park Place Shopping Center, Vallejo, CA 3,959 12,288 16,247 Blossom Valley Plaza, Turlock, CA 2,448 8,707 11,155 Coalinga Shopping Center, Coalinga, CA 816 3,030 3,846 Commonwealth Square Shopping Center, Folsom, CA 3,312 13,152 16,464 Country Gables Shopping Center, Granite Bay, CA 2,704 13,088 15,792 Heritage Oak Shopping Center, Gridley, CA 1,603 3,690 5,293 Belle Mill Landing, Red Bluff, CA 2,247 7,856 10,103 Anderson Square, Anderson, CA 1,145 2,481 3,626 North Hills Shopping Center, Reno, NV 1,700 6,973 8,673 North Hills (Phase II) 3,706 0 3,706 Cobblestone Shopping Center, Redding, CA 2,375 8,135 10,510 Victorian Walk Shopping Center, Fresno, CA 1,120 7,555 8,675 Elko Junction Shopping Center, Elko, CA 580 8,164 8,744 Elko Junction (Phase II) 1,752 4,607 6,359 Skypark Plaza Shopping Center, Chico, CA 2,854 11,884 14,738 Heritage Park Shopping Center, Suisun, CA 3,575 12,465 16,040 Pinecreek Shopping Center, Grass Valley, CA (50% interest)(2) 2,725 8,077 10,802 Eagle Station Shopping Center, Carson City, NV 1,735 7,737 9,472 Currier Square Shopping Center, Oroville, CA 2,025 7,942 9,967 Yreka Junction, Yreka, CA 1,350 6,291 7,641 Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,446 10,371 Raley's Supermarket, Fallon, NV 1,000 3,220 4,220 Caughlin Ranch Shopping Center, Reno, NV 2,950 7,458 10,408 Mercantile Row Shopping Center, Dinuba, CA 1,440 6,269 7,709 Elverta Crossing Shopping Center, Sacramento, CA 3,370 8,116 11,486 Centennial Plaza Shopping Center, Hanford, CA 2,225 9,013 11,238 Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,185 13,976 - ---------------------------------------------------------------------------------------------------------------------------------- Column A Column F Column G Column H Column I - ---------------------------------------------------------------------------------------------------------------------------------- Life on which depreciation in the latest income Accumulated Date of Date statement Property Name Depreciation Construction Acquired is computed - ---------------------------------------------------------------------------------------------------------------------------------- Shopping Center/Retail - ---------------------- Luckys, El Cerrito, CA (3) $746 1964/1983 1964 31 San Antonio Center, Mountain View, CA (3) 1,823 1959/1990 1965 10 to 31 Kmart, Napa, CA N/A 1964 1966 N/A Luckys, Santa Maria, CA (3) 376 1962 1967 28 Carpeteria, Concord, CA (3) 301 1963 1969 20 to 30 Acapulco Y Los Arcos, Fresno, CA (3) 369 1972 1972 28 Serra Center, Colma, CA (30% interest)(1) 709 1972 1973/1988 8 to 31 Dodge Center, Fallon, NV (3) 1,224 1976 1977 24 to 31 West Town, Winnemuca, NV 1,631 1978/1991 1978 25 to 31 Nob Hill General Stores, Watsonville, CA 621 1982 1982 25 Eastridge Plaza Shopping Center, Porterville, CA 1,469 1985 1985 3 to 35 Angel's Camp Town Center, Angels Camp, CA 1,476 1986 1985 2 to 31 Heritage Place Shopping Center, Tulare, CA 2,326 1986 1985 3 to 31 Raley's Shopping Center, Yuba City, CA 1,699 1963/1984 1986 4 to 40 Canal Farms Shopping Center, Los Banos, CA 2,050 1988 1986 3 to 32 Kmart Center, Sacramento, CA 1,139 1964/1986 1986 4 to 31 Park Place Shopping Center, Vallejo, CA 2,590 1987 1990 2 to 31 Blossom Valley Plaza, Turlock, CA 1,792 1988/1991 1990 5 to 31 Coalinga Shopping Center, Coalinga, CA 1,014 1977 1987 3 to 31 Commonwealth Square Shopping Center, Folsom, CA 2,801 1988 1990 3 to 31 Country Gables Shopping Center, Granite Bay, CA 2,480 1988 1991 2 to 31 Heritage Oak Shopping Center, Gridley, CA 1,120 1981 1987 10 to 31 Belle Mill Landing, Red Bluff, CA 2,056 1982/1987/1994 1987 3 to 31 Anderson Square, Anderson, CA 737 1979 1987 5 to 31 North Hills Shopping Center, Reno, NV 1,944 1986 1988 4 to 31 North Hills (Phase II) N/A 1993 N/A Cobblestone Shopping Center, Redding, CA 2,258 1984 1988 3 to 31 Victorian Walk Shopping Center, Fresno, CA 1,951 1988 1988 3 to 31 Elko Junction Shopping Center, Elko, CA 2,000 1986/1991 1988 3 to 31 Elko Junction (Phase II) 63 1994/1996 1993 31 Skypark Plaza Shopping Center, Chico, CA 3,023 1985/1991 1988 3 to 31 Heritage Park Shopping Center, Suisun, CA 2,659 1989 1990 3 to 31 Pinecreek Shopping Center, Grass Valley, CA (50% interest)(2) 2,084 1988 1989 3 to 31 Eagle Station Shopping Center, Carson City, NV 1,823 1982 1989 3 to 31 Currier Square Shopping Center, Oroville, CA 1,890 1969/1989 1989 5 to 31 Yreka Junction, Yreka, CA 1,606 1984 1990 5 to 31 Ukiah Crossroads Shopping Center, Ukiah, CA 2,048 1986 1989 3 to 31 Raley's Supermarket, Fallon, NV 615 1991 1991 31 Caughlin Ranch Shopping Center, Reno, NV 1,347 1990/1991 1990 3 to 31 Mercantile Row Shopping Center, Dinuba, CA 1,214 1990 1990 3 to 31 Elverta Crossing Shopping Center, Sacramento, CA 1,430 1991/1993 1990 3 to 31 Centennial Plaza Shopping Center, Hanford, CA 730 1991 1994 5 to 31 Laguna 99 Shopping Center, Elk Grove, CA 933 1993 1994 4 to 31
continued on next page Western Investment Real Estate Trust Schedule III - Real Estate and Accumulated Depreciation December 31, 1996 (In thousands except for dates of construction and acquisition and depreciable lives)
- ---------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D - ---------------------------------------------------------------------------------------------------------------------------------- Cost capitalized/(sold) Initial cost to company subsequent to acquisition - ---------------------------------------------------------------------------------------------------------------------------------- Buildings and Property Name Encumbrances Land Improvements Land Improvements - ---------------------------------------------------------------------------------------------------------------------------------- Shopping Center/Retail - ---------------------- Mission Ridge Shopping Center, Manteca, CA 2,373 9,552 0 33 Northridge Shopping Center, Fair Oaks, CA 1,666 6,830 0 (81) Plaza 580 Shopping Center, Livermore, CA 2,941 11,768 403 597 Nob Hill General Stores, Hollister, CA 960 3,869 0 0 Nob Hill General Stores, Newman, CA 626 2,535 0 0 --------------------------------------------------------------------------- Total Shopping Center/Retail 0 79,153 267,151 328 23,961 Industrial - ---------- Viking Freight Systems, Santa Clara, CA (3) 548 0 0 0 Merchants, Inc., Commerce City, CO (3) 278 648 0 263 --------------------------------------------------------------------------- Total Industrial 0 826 648 0 263 Commercial - ---------- US Postal Service, Boulder Creek, CA (3) 8 38 0 31 Coast Savings & Loan, Cupertino, CA 615 845 0 0 Coast Savings & Loan (Taraval St), San Francisco, CA 366 1,824 0 0 Coast Savings & Loan, Monterey, CA 911 2,189 0 0 Coast Savings & Loan (Market St), San Francisco, CA 873 1,068 0 0 Coast Savings & Loan, Santa Cruz, CA 205 823 0 0 Coast Savings & Loan, Salinas, CA (3) 516 1,632 0 0 3450 California St., San Francisco, CA 1,450 1,159 0 279 Redwood II, Petaluma, CA 1,017 3,052 0 0 Heald Business College, Milpitas, CA 979 6,020 0 684 --------------------------------------------------------------------------- Total Commercial 0 6,940 18,650 0 994 --------------------------------------------------------------------------- Total All Properties $0 $86,919 $286,449 $328 $25,218 --------------------------------------------------------------------------- --------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Column A Column E - ---------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period. - ---------------------------------------------------------------------------------------------------------------------------------- Properties Operating under Direct Buildings and Financing Property Name Land Improvements Leases Total - ---------------------------------------------------------------------------------------------------------------------------------- Shopping Center/Retail - ---------------------- Mission Ridge Shopping Center, Manteca, CA 2,373 9,585 11,958 Northridge Shopping Center, Fair Oaks, CA 1,666 6,749 8,415 Plaza 580 Shopping Center, Livermore, CA 3,344 12,365 15,709 Nob Hill General Stores, Hollister, CA 960 3,869 4,829 Nob Hill General Stores, Newman, CA 626 2,535 3,161 --------------------------------------------------------------------------- Total Shopping Center/Retail 79,481 291,112 600 371,193 Industrial - ---------- Viking Freight Systems, Santa Clara, CA (3) 548 0 1,197 1,745 Merchants, Inc., Commerce City, CO (3) 278 911 1,189 --------------------------------------------------------------------------- Total Industrial 826 911 1,197 2,934 Commercial - ---------- US Postal Service, Boulder Creek, CA (3) 8 69 77 Coast Savings & Loan, Cupertino, CA 615 845 1,460 Coast Savings & Loan (Taraval St), San Francisco, CA 366 1,824 2,190 Coast Savings & Loan, Monterey, CA 911 2,189 3,100 Coast Savings & Loan (Market St), San Francisco, CA 873 1,068 1,941 Coast Savings & Loan, Santa Cruz, CA 205 823 1,028 Coast Savings & Loan, Salinas, CA (3) 516 1,632 2,148 3450 California St., San Francisco, CA 1,450 1,438 2,888 Redwood II, Petaluma, CA 1,017 3,052 4,069 Heald Business College, Milpitas, CA 979 6,704 7,683 --------------------------------------------------------------------------- Total Commercial 6,940 19,644 0 26,584 --------------------------------------------------------------------------- Total All Properties $87,247 $311,667 $1,797 $400,711 --------------------------------------------------------------------------- --------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Column A Column F Column G Column H Column I - ---------------------------------------------------------------------------------------------------------------------------------- Life on which depreciation in the latest income Accumulated Date of Date statement Property Name Depreciation Construction Acquired is computed - ---------------------------------------------------------------------------------------------------------------------------------- Shopping Center/Retail - ---------------------- Mission Ridge Shopping Center, Manteca, CA 797 1993 1994 5 to 31 Northridge Shopping Center, Fair Oaks, CA 592 1958/1986 1994 10 to 31 Plaza 580 Shopping Center, Livermore, CA 989 1993/1996 1994/1996 5 to 31 Nob Hill General Stores, Hollister, CA 263 1994 1994 31 Nob Hill General Stores, Newman, CA 153 1995 1995 31 ---------------- Total Shopping Center/Retail 64,961 Industrial - ---------- Viking Freight Systems, Santa Clara, CA (3) N/A 1978 1978 N/A Merchants, Inc., Commerce City, CO (3) 208 1984 1984 24 to 35 ---------------- Total Industrial 208 Commercial - ---------- US Postal Service, Boulder Creek, CA (3) 49 1959 1969 5 to 30 Coast Savings & Loan, Cupertino, CA 380 1980 1985 25 Coast Savings & Loan (Taraval St), San Francisco, CA 803 1975 1985 25 Coast Savings & Loan, Monterey, CA 963 1963 1985 25 Coast Savings & Loan (Market St), San Francisco, CA 470 1964 1986 25 Coast Savings & Loan, Santa Cruz, CA 218 1980 1986 40 Coast Savings & Loan, Salinas, CA (3) 429 1937 1986 40 3450 California St., San Francisco, CA 619 1957/1987 1987 10 to 31 Redwood II, Petaluma, CA 771 1985 1989 31 Heald Business College, Milpitas, CA 1,925 1987 1987 10 to 31 ---------------- Total Commercial 6,627 ---------------- Total All Properties $71,796 ---------------- ----------------
(1) Serra Center is encumbered by a note and deed of trust under which the 70% co-owner in the borrower. (2) Pinecreek is encumbered by a note and deed of trust under which the 50% co-owner is the borrower. (3) The Trust is holding this property for sale. (4) The aggregate cost or adjusted basis of rental property for federal income tax purposes reconciles to the amount reflected in the financial statements at December 31, 1996 as follows:
Basis for federal income tax purposes $310,460 Direct financing leases capitalized for financial reporting purposes ($3,153) Reduction in tax basis for deferred gains on condemnation and other sales and discharge of indebtedness $4,301 Miscellaneous differences $59 ---------- Financial statement reporting basis $311,667 ---------- ----------
continued on next page
WESTERN INVESTMENT REAL ESTATE TRUST 1996 BUILDING IMPROVEMENT AND LEASING RELATED COST ADDITIONS NAME LOCATION BUILDING LEASING - ---- -------- IMPROVEMENT RELATED COST ----------- ------------ SHOPPING CENTERS / RETAIL SAN ANTONIO CENTER MOUNTAIN VIEW, CA $ 126 $ 137 SERRA CENTER (30%) COLMA, CA 19 16 EASTRIDGE PLAZA PORTERVILLE, CA 10 - ANGELS CAMP TOWN CENTER ANGELS CAMP, CA 19 - HERITAGE PLACE TULARE, CA 8 - RALEY'S CENTER YUBA CITY, CA 122 - CANAL FARMS LOS BANOS, CA 8 - KMART CENTER SACRAMENTO, CA 235 - PARK PLACE VALLEJO, CA 510 21 BLOSSOM VALLEY PLAZA TURLOCK, CA 11 - COALINGA COALINGA, CA 60 - COMMONWEALTH SQUARE FOLSOM, CA 32 13 COUNTRY GABLES GRANITE BAY, CA 78 - BELLE MILL LANDING RED BLUFF, CA (9) - ANDERSON SQUARE ANDERSON, CA 30 - NORTH HILLS RENO, NV 6 - COBBLESTONE REDDING, CA 16 - VICTORIAN WALK FRESNO, CA 22 - ELKO JUNCTION PHASE II ELKO, NV 3,168 48 SKYPARK PLAZA CHICO, CA 103 28 HERITAGE PARK SUISUN, CA 148 5 PINECREEK (50%) GRASS VALLEY, CA 3 17 EAGLE STATION CARSON CITY, NV 42 - CURRIER SQUARE OROVILLE, CA (8) - YREKA JUNCTION YREKA, CA 5 - CAUGHLIN RANCH RENO, NV 38 15 MERCANTILE ROW DINUBA, CA 79 - ELVERTA CROSSING SACRAMENTO, CA 12 - CENTENNIAL PLAZA HANFORD, CA 73 - LAGUNA 99 PLAZA ELK GROVE, CA 16 - MISSION RIDGE PLAZA MANTECA, CA 24 - NORTHRIDGE FAIR OAKS, CA 42 - PLAZA 580 LIVERMORE, CA 570 7 --------- --------- SUBTOTAL - SHOPPING CENTERS / RETAIL $ 5,618 $ 307 --------- --------- COMMERCIAL ---------- HEALD BUSINESS COLLEGE MILPITAS, CA 170 43 --------- --------- SUBTOTAL - COMMERCIAL $ 170 $ 43 --------- --------- TOTAL $ 5,788 $ 350 --------- --------- --------- ---------
40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. There have been no disagreements with the independent accountants on the Trust's accounting and financial disclosure. Additionally, there has been no change of the independent accountant engaged to audit the Trust's financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information with respect to the trustees and executive officers of the Trust is incorporated by reference to the section entitled "Trustees and Executive Officers" of the Trust's definitive Proxy Statement in connection with the annual Meeting of Shareholders to be held May 8, 1997, which will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, pursuant to General Instruction G to this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Information with respect to executive compensation is incorporated by reference to the sections entitled "Compensation of Trustees", "Compensation of Executive Officers", "Compensation Pursuant to Plans", "Trustee Emeritus Program and Death and Disability Program", "Stock Option Grants and Exercises" and "Report of Compensation Committee on Executive Compensation" of the Trust's definitive Proxy Statement in connection with the annual Meeting of Shareholders to be held May 8, 1997, which will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, pursuant to General Instruction G to this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information with respect to security ownership of certain beneficial owners and management is incorporated by reference to the section entitled "Trustees and Executive Officers" of the Trust's definitive Proxy Statement in connection with the annual Meeting of Shareholders to be held May 8, 1997, which will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, pursuant to General Instruction G to this Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Trust, its employees, officers or trustees are not engaged in any related transactions with the Trust. Additionally, the Trust has never made any loans to its management. 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements - Included in Item 8 Page ---- Report of Independent Certified Public Accountants 22 Balance Sheets - December 31, 1996 and 1995 23 Financial Statements for the Years Ended December 31, 1996, 1995 and 1994: Statements of Income 24 Statements of Shareholders' Equity 25 Statements of Cash Flows 26 Notes to Financial Statements 27 to 37 2. Financial Statement Schedule III: Real Estate and Accumulated Depreciation 38 to 39 3. Additional Information: 1996 Building Improvement and Leasing Related Cost Additions (unaudited) 40 (b) 1. Reports on Form 8-K. None. (c) Exhibits. (3) Declaration of Trust, as amended (filed as Exhibit 3.1 to Registration Statement on Form S-3 No. 33-22893 and incorporated herein by reference). (4.1) Form of Indenture relating to the 8% Convertible Debentures (filed as Exhibit 4.1 to Registration Statement on Form S-3 No. 33-22893 and incorporated herein by reference). (4.2) Form of Indenture relating to the Senior Notes (filed as Exhibit 4.1 to registration Statement on Form S-3 No. 33-71270 and incorporated herein by reference). (4.3) Form of Senior Notes (filed as Exhibit 4.2 to Registration Statement on Form S-3 No. 33-71270 and incorporated herein by reference). 42 Page ---- (10.1)** Trust's Nonqualified Stock Option Plan (filed as Exhibit 4.2 to Registration Statement on Form S-8 No. 33-27016 and incorporated herein by reference). (10.2)** Trust's Trustee Emeritus Plan (filed as an Exhibit to Proxy Statement dated March 25, 1986, and incorporated herein by reference. (23) * Consent of Independent Certified Public Accountants 44 - ---------- * Filed with this report. ** Management contract or compensatory plan or arrangement. 43 Consent of Independent Certified Public Accountants The Trustees Western Investment Real Estate Trust: We consent to incorporation by reference in the registration statement (No. 33-27016) on Form S-8 of Western Investment Real Estate Trust of our report dated February 4, 1997, relating to the balance sheets of Western Investment Real Estate Trust as of December 31, 1996 and 1995, and the related statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, and the related financial statement schedule, which report appears in the December 31, 1996, annual report on Form 10-K of Western Investment Real Estate Trust. KPMG PEAT MARWICK LLP San Francisco, California March 13, 1997 44 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. WESTERN INVESTMENT REAL ESTATE TRUST (Registrant) By: s/ Dennis D. Ryan ---------------------------------------- Dennis D. Ryan Executive Vice President, Chief Financial Officer Dated: March 13, 1997 and Trustee Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- s/ O. A. Talmage Chairman of the Board, March 13, 1997 - ------------------------- Chief Executive -------------- O. A. Talmage Officer and Trustee s/ William A. Talmage President, March 13, 1997 - ------------------------- Chief Operating Officer -------------- William A. Talmage and Trustee s/ Dennis D. Ryan Executive Vice President, March 13, 1997 - ------------------------- Chief Financial Officer -------------- Dennis D. Ryan and Trustee s/ Chester R. Macphee, Jr. Trustee March 13, 1997 - ------------------------- -------------- Chester R. MacPhee, Jr. s/ Reginald B. Oliver Trustee March 13, 1997 - ------------------------- -------------- Reginald B. Oliver s/ James L. Stell Trustee March 13, 1997 - ------------------------- -------------- James L. Stell 45 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND BALANCE SHEET AT DECEMBER 31, 1996. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 952 0 0 0 0 0 384,550 66,271 339,629 0 143,457 0 0 242,054 (50,106) 339,629 0 47,001 0 11,626 12,970 0 11,289 12,231 0 12,231 0 0 0 12,231 0.72 0.72 AMOUNT INSIGNIFICANT. BALANCE SHEET IS NOT CLASSIFIED: AMOUNT REPRESENTS ACCUMULATED DIVIDENDS IN EXCESS OF NET INCOME. AMOUNT COMPRISED OF PROPERTY OPERATING COSTS ($8,933) AND OTHER OPERATING EXPENSES ($2,693). AMOUNT COMPRISED OF DEPRECIATION EXPENSE ($11,264) AND GENERAL AND ADMINISTRATIVE EXPENSE ($1,706). EXERCISE OF THE OUTSTANDING STOCK OPTIONS WOULD NOT HAVE MATERIAL EFFECT ON EARNINGS PER SHARE.
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