-----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, VrUY6sBs7mp5Q51SqBnr6X+crDmBJdQ03rXzHA/dw+WXIg2eK8lEi6NutcwByj/C qPFRrInfo2a5ptrEqo/Yng== 0001047469-98-012492.txt : 19980331 0001047469-98-012492.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012492 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 001-08723 FILM NUMBER: 98578918 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 THE 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 For the fiscal year ended DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-2809 WESTERN INVESTMENT REAL ESTATE TRUST - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its character) 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 ------------------- -------------------- None None - ---------------------------------- ----------------------------- 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 ----- ----- 1 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 March 1, 1998, based on the reported closing sales price of the Company's shares of beneficial interest on the American Stock Exchange on such date, was $243,615,000. (The Company 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 - 17,192,460 shares as of March 1, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's proxy statement with respect to its 1998 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. 2 WESTERN INVESTMENT REAL ESTATE TRUST INDEX TO 10-K
PART I Page ---- Item 1 Business 4 to 13 Item 2 Properties 13 to 16 Item 3 Legal Proceedings 17 Item 4 Submission of Matters to a Vote of Security Holders 17 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6 Selected Financial Data 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 to 25 Item 7A Quantitative and Qualitative Disclosures About Market Risk 25 Item 8 Financial Statements 26 to 45 Financial Statement Schedule 46 to 47 Additional Information: 1997 Building Improvement and Leasing Related Cost Additions (unaudited) 48 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 49 PART III Item 10 Directors and Executive Officers of the Registrant 49 Item 11 Executive Compensation 49 Item 12 Security Ownership of Certain Beneficial Owners and Management 49 Item 13 Certain Relationships and Related Transactions 49 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 50 to 52 Signatures 53
3 PART I ITEM 1. BUSINESS. (a) GENERAL DEVELOPMENT OF BUSINESS. Western Investment Real Estate Trust ("The Company") is a real estate investment trust ("REIT") and qualifies as such under Sections 856 and 960 of the Internal Revenue Code. The Company was organized under the laws of the State of California in 1962 and commenced real estate operations in 1964. In order that the Company may continue to qualify as a REIT: (i) must be taxable as a domestic entity, (ii) the beneficial ownership of which is held by 100 or more persons, (iii) at least 95% of its gross income is derived from real estate assets, dividends and interest, (iv) at least 75% of its gross income is derived from real estate assets, (v) at the close of each quarter of the taxable year, at least 75% of the value of its total assets is reopresented by real estate assets, cash and government securities, and (vi) the Company must distribute annually to its shareholders an amount equal to or exceeding 95% of its REIT taxable income. Under the terms of its Declaration of Trust, the Company 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 Company's funds have been invested in the ownership of real estate. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company is not engaged in different segments of a business nor is the Company engaged in more than one line of business. (c) NARRATIVE DESCRIPTION OF BUSINESS. The Company, which at December 31, 1997 employed 45 people, is in the business of acquiring, managing, leasing and developing retail, commercial and industrial properties. Additionally, the Company's wholly owned subsidiary, WIRET Asset Management Services, is a licensed real estate broker in the state of California. At December 31, 1997, the Company owned 42 retail properties, 9 commercial properties and 2 industrial properties with a combined gross leasable area of 4.7 million square feet. The Company's executive office is located at 3450 California Street, San Francisco, California, 94118, and can be reached at (415) 929-0211. Additionally, the Company maintains a regional office in the Sacramento area and the Central Valley area. 4 THE PROPERTIES As of December 31, 1997, the Company owned 42 neighborhood and community shopping centers and other retail properties with an average size of approximately 106,000 square feet of GLA. Thirteen of these properties are significant portions of larger, integrated shopping centers managed by the Company with an average GLA of approximately 195,000 square feet. The Company leases a substantial portion of its total GLA on a long-term, triple net basis. As of December 31, 1997, approximately 63% of the Company's total retail GLA was leased to anchor tenants of which 74% of the anchor tenant space was leased to grocery or drug store anchor tenants. Additionally, as of that date, approximately 80% of the Company's Annualized Base Rent (as herein defined) was derived from national or regional retail tenants. The following tables set forth, as of December 31, 1997, certain information with respect to the Company's properties: SHOPPING CENTER AND RETAIL - ANCHOR/NON-ANCHOR
Annualized Percentage Annualized Type of GLA Percentage Base Rent Of Base Rent Tenant (Square of Leased Annualized Per Leased Space (1) Feet) GLA Space (2) Base Rent Square Foot ----- ----- --- --------- --------- ----------- Anchor................................ 2,823,266 63% $18,873,000 51% $ 6.68 Non-Anchor............................ 1,314,932 30% 18,444,000 49% 14.03 Unleased.............................. 326,562 7% --- --- --- --------- ----- ----------- ------- ---------- ---------- Total or Weighted Average....... 4,464,760 100% $37,317,000 100% $ 8.36
SHOPPING CENTER AND RETAIL - NATIONAL/REGIONAL/LOCAL
Annualized Percentage Annualized Type of GLA Percentage Base Rent Of Base Rent Tenant (Square of Leased Annualized Per Leased Space (3) Feet) GLA Space (2) Base Rent Square Foot ----- ----- --- --------- --------- ----------- National.............................. 1,739,503 39% $15,443,000 41% $ 8.88 Regional.............................. 1,802,540 41% 14,445,000 39% 8.01 Local................................. 596,155 13% 7,429,000 20% 12.46 Unleased.............................. 326,562 7% --- --- --- --------- ----- ------------- ------- ---------- ---------- Total or Weighted Average....... 4,464,760 100% $37,317,000 100% $ 8.36
5 The Company's portfolio of 53 properties at December 31, 1997 is summarized as follows: ALL PROPERTIES
Annualized Percentage Annualized GLA Percentage Base Rent Of Base Rent Property (Square of Leased Annualized Per Leased Type Feet) GLA Space (2) Base Rent Square Foot ---- ---- --- --------- --------- ----------- Shopping Center and Retail............ 4,464,760 95% $37,317,000 93% $ 8.36 Commercial............................ 177,371 4% 2,432,000 6% 13.71 Industrial............................ 78,322 1% 553,000 1% 7.06 ---------- ----- ------------- ----- -------- -------- Total or Weighted Average....... 4,720,453 100% $40,302,000 100% $ 8.54
(1) Tenants leasing 10,000 square feet or more are defined as "Anchor" tenants. (2) "Annualized Base Rent" represents the annualized minimum monthly rent in effect on December 31, 1997. (3) "National" tenants are tenants with locations in multiple states. "Regional" tenants are tenants with three or more locations in one state, and "Local" tenants are tenants with fewer than three locations and operate exclusively within one state. The following table summarizes the composition of the Company's real estate investments as of December 31, 1997 by type based on amounts invested by the Company:
PORTFOLIO SUMMARY Amount of Number of Investment (1) Property Types Investments (000's) Percentage -------------- ----------- -------------- ---------- Real Estate Investments ----------------------- Shopping Center and Retail 41 $366,467 93% Commercial 8 24,359 6% Industrial 1 1,644 1% -- ---------- ---- 50 $392,470 100% -- ---------- ---- -- ---------- ---- Real Estate Properties Held for Sale ------------------------------------ Shopping Center and Retail 1 $ 2,032 38% Commercial 1 2,148 40% Industrial 1 1,202 22% -- ---------- ---- 3 $ 5,382 100% -- ---------- ---- -- ---------- ----
(1) Reflects the original cost plus capital improvements, before depreciation and amortization. 6 REAL ESTATE INVESTMENTS AND PROPERTIES HELD FOR SALE (COMBINED)
Percentage of Weighted Average Property Number of Amount of Amount Occupancy Age Type Investments Investment (1) Invested Rate (2) (in years) (3) ----- ----------- ---------- ----------- ---------- -------------- (000's) Shopping Center and Retail............ 42 $368,499 93% 93% 13.5 Commercial............................ 9 26,507 6% 76% 23.3 Industrial............................ 2 2,846 1% 100% 17.4 --- ---------- -- ---- ---- ---- ---- Total or Weighted Average........ 53 $397,852 100% 92% 13.9 --- ---------- -- ---- ---- --- ---------- -- ---- ----
(1) Reflects the original cost plus capital improvements, before depreciation and amortization. (2) Once a space is subject to an executed lease, the space is then included in occupied space. A space continues to be incorporated in the Company's occupied space until: (1) the related lease expires and the tenant is no longer in legal possession, or (2) the related lease is legally terminated and the tenant is no longer in legal possession. (3) 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. COMPETITION There is considerable competition for the consumer dollar in most areas of California and Nevada where the Company's community shopping center properties are located. The Company believes that its major anchor tenants are strong competitors and will continue to draw consumers to its shopping centers. The Company 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 Company considers for purchase increases, the prices of such properties may increase and the yield decrease. The Company believes it can continue to compete effectively in the current real estate environment because of its experienced staff and management team. The Company 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 Company owns properties, the available supply of space for lease exceeds the demand by prospective tenants. In order to compete effectively, the Company employs experienced property and marketing managers and leasing agents. MAJOR TENANTS The Company's principal shopping center and retail tenants include substantial, well-recognized businesses such as Food-4-Less, Nob Hill Foods, Pak `N Save, Raley's, Safeway, Save Mart Supermarket and Thrifty-Payless (Rite Aid). 7 At December 31, 1997, Raley's, the Company's most significant tenant, a grocery and drug retailer, was a lessee in 19 of the Company's properties and accounted for 19% of the Company's 1997 total revenues. Raley's, a privately owned company, currently operates 115 stores in Northern California and Nevada. The Raley's organization has released information indicating that its sales exceeded $2 billion in its most recent reported fiscal year (June 28, 1997). In addition to receiving monthly sales reports, the Company receives audited financial statements annually from Raley's and uses them to monitor Raley's financial position and results of operations. Additionally, the Company is authorized to provide Raley's audited financial statements to Moody's Investors Service and Standard & Poor's, the Company's rating agencies. As of December 31, 1997, the Company's Senior Notes carry "investment grade" ratings from Moody's Investors Service (Baa3) and Standard & Poor's (BBB-). Please see note 7 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 0(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 63,024 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 Company. 8 The following table summarizes information on the Company's ten most significant tenants as of December 31, 1997:
Percentage of Company Percentage Number of Annualized GLA of Tenant Stores Base Rent (Square Feet) Company GLA ------ ------ --------- ------------- ----------- 1. Raley's................................. 19 19% 1,091,181 23% 2. Save Mart............................... 7 4% 228,678 5% 3. Safeway/Pak `N Save..................... 3 4% 140,883 3% 4. Coast Federal Savings Bank.............. 6 4% 76,193 2% 5. Thrifty-PayLess (Rite Aid).............. 10 3% 242,056 5% 6. Food-4-Less (Fleming Foods)............. 3 2% 142,625 3% 7. Nob Hill Foods.......................... 3 2% 111,933 2% 8. Round Table Pizza....................... 14 2% 42,262 1% 9. Scolari's Supermarkets.................. 1 1% 50,451 1% 10. Ross Dress for Less..................... 2 1% 50,368 1% ---- ---------- ---- Total............................... 42% 2,176,630 46% ---- ---------- ---- ---- ---------- ----
The Company 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 Company uses this information to monitor the payment of percentage rents where leases so provide. The Company recognized $552,000 and $649,000 of percentage rents during 1997 and 1996, respectively. Virtually all of the Company'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 Company 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 Company pays such expenses from current operating income. INSURANCE COVERAGE Most of the Company's leases require the tenant to be responsible for, or reimburse the Company for liability insurance coverage on the properties. The Company maintains umbrella liability insurance on all of its properties and monitors tenant compliance with liability insurance coverage requirements. While the Company believes its properties are adequately insured, the Company 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 Company's properties are located in areas of California and Nevada where earthquakes have been known to occur. In the event of a major earthquake, Company properties could suffer substantial damage or destruction. Since it commenced real estate operations in 1964, the Company has not incurred any material expense nor, to its knowledge, have any of its properties incurred any material damage from earthquakes or floods. 9 The Company periodically considers the merits of purchasing earthquake insurance. As of December 31, 1997, the Company has not purchased earthquake insurance because of: (i) the high premiums and deductibles and (ii) the Company'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 consist of relatively new single-story buildings. TENANT LEASE EXPIRATIONS FOR ALL PROPERTIES The tables on the following page sets forth information with respect to anchor and non-anchor tenant lease expirations as of December 31, 1997: 10
ANCHOR TENANTS (1) Annualized Average Base Gross Percentage of Base Rent Rent Per Number of Leasable Total Leased Under Square Foot of Lease Year Leases Area Gross Leasable Expiring Leases Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring - ---------- -------- -------- ------------- --------- ---------- 1998.................................... 1 10,662 0.3% $ 84,444 $ 7.92 1999.................................... 4 127,704 2.9% 179,064 1.40 2000.................................... 7 117,912 2.7% 1,482,252 12.57 2001.................................... 4 144,602 3.3% 653,052 4.52 2002.................................... 6 113,410 2.6% 490,764 4.33 2003.................................... 9 215,978 5.0% 1,528,248 7.08 2004.................................... 3 54,207 1.3% 403,224 7.44 2005.................................... 3 88,518 2.0% 771,780 8.72 2006.................................... 4 205,831 4.7% 1,395,768 6.78 2007.................................... 1 20,664 0.5% 116,544 5.64 Thereafter.............................. 45 1,912,521 43.9% 14,749,081 7.71 --- --------- ----- ----------- ------------ ------------ Total/Weighted Average 87 3,012,009 69.2% $21,854,221 $7.26
NON-ANCHOR TENANTS Annualized Average Base Gross Percentage of Base Rent Rent Per Number of Leasable Total Leased Under Square Foot of Lease Year Leases Area Gross Leasable Expiring Leases Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring - ---------- -------- -------- ------------- --------- ---------- Month-to-month................ 28 55,995 1.3% $ 627,924 $11.21 1998.......................... 121 207,874 4.8% 3,139,680 15.10 1999.......................... 105 217,118 5.0% 2,751,797 12.67 2000.......................... 100 191,997 4.4% 2,872,514 14.96 2001.......................... 62 125,002 2.9% 1,780,080 14.24 2002.......................... 63 157,483 3.6% 2,334,013 14.82 2003.......................... 36 111,847 2.6% 1,782,780 15.94 2004.......................... 11 34,645 0.8% 542,352 15.65 2005.......................... 12 51,230 1.2% 707,340 13.81 2006.......................... 4 17,714 0.4% 306,804 17.32 2007.......................... 12 41,808 0.9% 901,500 21.56 Thereafter.................... 38 127,033 2.9% 2,316,432 18.23 ---- ------- ------- --------- ------- ------- Total/Weighted Average 592 1,339,746 30.8% $20,063,216 $14.98 ---- --------- ------- ----------- ------- ------- Total/Weighted Average 679 4,351,755 (4) 100.0% $41,917,437 $9.63
(1) Anchor tenants are defined as tenants with 10,000 square feet or more of leasable area. (2) Does not reflect extension options granted to certain tenants. (3) Annualized Base Rent at lease expiration. (4) Total does not include 368,698 square feet GLA of unleased space (326,562 square feet GLA of shopping center and retail, and 42,136 square feet GLA of commercial). 11 PROPERTY OPERATIONS The Company is a fully integrated REIT that provides full property operation services to all but two of its properties. Property operations includes property management, marketing and leasing services. Internal management provides for regular interaction between the Company and its tenants and close supervision of its properties. No single property investment accounted for more than 4.2% of total revenues in 1997. The Company directly manages 51 of its 53 properties. In order to facilitate its present and future property operation activities, the Company maintains two branch offices which are centrally located to the properties. The offices are located at the Company's Country Gables shopping center in Granite Bay, California and at the Victorian Walk shopping center in Fresno, California. Internal management permits the Company to provide value added services to its tenants. For example, the Company's marketing staff works with the Company's tenants on promotional and advertising activities to draw consumers to the shopping centers. These activities help the Company attract and retain the national, regional and local retail tenants which serve the Northern California and Nevada markets. The Company 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. Two of the Company's 53 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 Company'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. 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 Company, its trustees, officers or any shareholder owning 5% or more of the Company's shares. Repairs and maintenance of the Company's properties not undertaken by tenants under the terms of the Company's triple-net leases are performed by independent contractors not affiliated with the Company, its trustees or officers, or any shareholder owning 5% or more of the Company'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 Company's properties, the Company and/or others may be held strictly liable for all costs and liabilities relating to the clean-up of such hazardous substances. 12 In order to mitigate environmental risks, in 1989 the Company 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 Company deems it appropriate, it has obtained independent environmental analyses on properties acquired prior to 1989. Although the Company 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 Company carries no insurance coverage expressly for the type of environmental risk described above. ITEM 2. PROPERTIES. Property information is presented on the following pages. 13 ITEM 2: PROPERTIES
Minimum Rent ------------------ 12/31/97 Year Year Last Name Location 1997 1996 Occupancy (1) Completed Renovated ---- -------- ---- ---- ------------- --------- --------- (in thousands) I. Minimum Rents Shopping Center/Retail ---------------------- Anderson Square Anderson, CA $350 $327 95.97% 1979 Angel's Camp Town Center Angel's Camp, CA 595 571 98.51% 1986 Skypark Plaza Shopping Center Chico, CA 1,371 1,297 95.36% 1985 1991 Coalinga Shopping Center Coalinga, CA 293 323 74.95% 1977 Serra Center (30% interest) Colma, CA 467 495 100.00% 1972 Carpeteria (2) Concord, CA 133 228 SOLD 1963 Mercantile Row Shopping Center Dinuba, CA 770 743 95.74% 1990 Luckys El Cerrito, CA 241 241 100.00% 1964 1983 Laguna 99 Shopping Center Elk Grove, CA 1,426 1,356 100.00% 1993 Northridge Shopping Center Fair Oaks, CA 763 770 92.15% 1958 1986 Commonwealth Square Shopping Center Folsom, CA 1,561 1,592 98.18% 1988 Acapulco Y Los Arcos (2) Fresno, CA 93 125 SOLD 1972 Victorian Walk Shopping Center Fresno, CA 804 795 93.72% 1982 1994 Country Gables Shopping Center Granite Bay, CA 1,245 1,247 93.75% 1988 Pinecreek Shopping Center Grass Valley, CA 952 939 93.02% 1988 Heritage Oak Shopping Center Gridley, CA 436 462 77.84% 1981 Centennial Plaza Shopping Center Hanford, CA 1,210 1,204 99.11% 1991 Nob Hill General Store Hollister, CA 480 480 100.00% 1994 Plaza 580 Shopping Center Livermore, CA 1,444 1,419 90.59% 1993/1996 Canal Farms Shopping Center Los Banos, CA 849 853 100.00% 1988 Mission Ridge Shopping Center Manteca, CA 1,141 1,112 93.07% 1993 San Antonio Center (2) Mountain View, CA 396 483 SOLD 1959 1990 Nob Hill General Store Newman, CA 313 313 100.00% 1995 Currier Square Shopping Center Oroville, CA 979 1,002 69.43% 1969 1989 Eastridge Plaza Shopping Center Porterville, CA 466 479 83.47% 1985 Belle Mill Landing Red Bluff, CA 699 812 89.16% 1982 1995 Cobblestone Shopping Center Redding, CA 919 930 82.66% 1981 Denny's (3) Redwood City, CA - 21 SOLD 1968 Kmart Center Sacramento, CA 362 372 89.01% 1964 1986 Elverta Crossing Shopping Center Sacramento, CA 1,172 1,185 96.01% 1991 1993 Luckys (2) Santa Maria, CA 15 49 SOLD 1962 1995 Kwik Stop (3) Santa Rosa, CA - 35 SOLD 1970 1995 Heritage Park Shopping Center Suisun, CA 1,400 1,223 92.58% 1989 Heritage Place Shopping Center Tulare, CA 888 1,005 96.33% 1986 Blossom Valley Plaza Turlock, CA 1,107 1,102 96.61% 1988 1991 Ukiah Crossroads Shopping Center Ukiah, CA 876 854 88.07% 1986 Park Place Shopping Center Vallejo, CA 1,577 1,579 88.48% 1987 Nob Hill General Store Watsonville, CA 195 195 100.00% 1982 Yreka Junction Yreka, CA 708 629 98.12% 1984 Raley's Shopping Center Yuba City, CA 914 971 94.62% 1963 1995 Eagle Station Shopping Center Carson City, NV 857 892 90.03% 1982 Elko Junction Shopping Center Elko, NV 1,285 1,033 91.27% 1979/1994/1996 Dodge Center Fallon, NV 224 282 100.00% 1976 1995 Raley's Supermarket Fallon, NV 401 401 100.00% 1991 Caughlin Ranch Shopping Center Reno, NV 1,102 969 100.00% 1990 1991 North Hills Shopping Center Reno, NV 843 831 89.59% 1986 West Town Winnemuca, NV 461 461 100.00% 1978 1991 ------- ------- Sub-total - Shopping Center/Retail $34,782 $34,687 ------- -------
14 ITEM 2: PROPERTIES
Minimum Rent ------------------ 12/31/97 Year Year Last Name Location 1997 1996 Occupancy (1) Completed Renovated ---- -------- ---- ---- ------------- --------- --------- (in thousands) Industrial - ---------- Viking Freight Systems Santa Clara, CA $443 $422 100.00% 1978 Old Dominion Commerce City, CO 62 115 100.00% 1984 1995 ---- ---- Sub-total - Industrial $505 $537 ---- ---- Commercial - ---------- US Postal Service (2) Boulder Creek, CA $ - $ 6 SOLD 1959 Coast Savings & Loan Cupertino, CA 216 216 100.00% 1980 Heald Business College Milpitas, CA 513 513 100.00% 1987 1995 Coast Savings & Loan Monterey,CA 450 450 100.00% 1963 Redwood II Petaluma, CA 25 483 0.00% 1985 Coast Savings & Loan Salinas, CA 321 320 100.00% 1937 Coast Savings & Loan (Market St) San Francisco, CA 291 291 100.00% 1964 Coast Savings & Loan (Taraval St) San Francisco, CA 328 328 100.00% 1975 3450 California St San Francisco, CA 230 226 100.00% 1957 1987 Coast Savings & Loan Santa Cruz, CA 184 184 100.00% 1980 ------- ------- Sub-total - Commercial $2,558 $3,017 ------- ------- Total Minimum Rent $37,845 $38,241 ------- ------- ------- -------
Percentage Rents -------------------- 1997 1996 ---- ---- (in thousands) II. Percentage Rent Anderson Square Anderson, CA $ 45 $ 56 95.97% 1979 Coalinga Shopping Center Coalinga, CA 67 62 74.95% 1977 Northridge Shopping Center Fair Oaks, CA 48 54 92.15% 1958 1986 Commonwealth Square Shopping Center Folsom, CA 7 5 98.18% 1988 Victorian Walk Shopping Center Fresno, CA 4 2 93.72% 1982 1994 Country Gables Shopping Center Granite Bay, CA 1 1 93.75% 1988 Pinecreek Shopping Center Grass Valley, CA - 1 93.02% 1988 Heritage Oak Shopping Center Gridley, CA 39 60 77.84% 1981 Centennial Plaza Shopping Center Hanford, CA - 2 99.11% 1991 Kmart Center Napa, CA 88 122 100.00% 1964 Cobblestone Shopping Center Redding, CA 14 4 82.66% 1981 Denny's (3) Redwood City, CA - 2 SOLD 1968 Kmart Center Sacramento, CA 62 47 89.01% 1964 1986 Luckys (2) Santa Maria, CA 43 104 SOLD% 1962 1995 Heritage Park Shopping Center Suisun, CA 1 2 92.58% 1989 Park Place Shopping Center Vallejo, CA 9 21 88.48% 1987 Nob Hill General Stores Watsonville, CA 83 84 100.00% 1982 Eagle Station Shopping Center Carson City, NV 21 18 90.03% 1982 Dodge Center Fallon, NV 14 2 100.00% 1976 1995 Caughlin Ranch Shopping Center Reno, NV 6 - 100.00% 1990 1991 ---- -------- Total Percentage Rent Income $552 $649 ---- -------- ---- --------
15 ITEM 2: PROPERTIES
Direct Financing Leases(4) ------------------ 12/31/97 Year Year Last Name Location 1997 1996 Occupancy (1) Completed Renovated ---- -------- ---- ---- ------------- --------- --------- (in thousands) III. Direct Financing Leases Kmart Center (5) Napa, CA $ 66 $ 99 100.00% 1964 Viking Freight Systems (6) Santa Clara, CA 89 98 100.00% 1978 ---- -------- $155 $197 ---- -------- ---- --------
(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) Sold in 1997. (3) Sold in 1996. (4) Included in Other Income. (5) Kmart Center, Napa, California, is accounted for as a direct financing lease. During 1997, the Company received $281,000 in minimum lease payments, of which $66,000 comprised direct financing income and $215,000 is a non-revenue receipt accounted as principal reduction. During 1996, the Company received $281,000 in minimum lease payments, of which $99,000 comprised direct financing income and $182,000 is a non-revenue receipt accounted as principal reduction. This lease expires January 1999. (6) Viking Freight Systems, Santa Clara, California, is accounted for as a direct financing lease. During 1997, the Company received $189,000 in minimum lease payments, of which $89,000 comprised direct financing income and $100,000 is a non-revenue receipt accounted as principal reduction. During 1996, the Company received $189,000 in minimum lease payments, of which $98,000 comprised direct financing income and $91,000 is a non-revenue receipt accounted as principal reduction. This lease expires September 2003. 16 ITEM 3. LEGAL PROCEEDINGS. The Company 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 Company'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 Company, without par value, are listed on the American Stock Exchange under the symbol "WIR". The following table sets forth the high and low closing prices of the shares as reported by the American Stock Exchange:
Quarter Ended High Low Dividends - ------------- ---- --- --------- March 31, 1996 $11.750 $10.625 $0.28 June 30, 1996 13.000 10.750 0.28 September 30, 1996 13.125 12.000 0.28 December 31, 1996 13.875 12.500 0.28 March 31, 1997 13.500 $12.500 $0.28 June 30, 1997 14.000 12.375 0.28 September 30, 1997 13.875 12.813 0.28 December 31, 1997 14.750 12.688 0.28 Through February 28, 1998 $15.250 $13.500 $0.28(1)
(1) Paid March 15, 1998 Approximate number of equity security holders:
Title of Class Number of Record Holders -------------- ------------------------ (as of December 31, 1997) Shares of Beneficial Interest, without par value 2,136
The Company estimates that there were over 18,000 beneficial owners of shares, including owners whose shares were held in brokerage and Company accounts. 17 ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share and share data) OPERATING DATA: Revenues (1)..................................... $47,551 $47,789 $46,290 $43,308 40,239 Income before gains on sales of real estate investments and extraordinary item..... 9,602 11,116 10,257 9,911 11,594 Net income ...................................... 12,880 12,231 10,304 15,266 11,594 Funds from operations (2)........................ 22,392 22,274 21,017 20,084 20,522 Cash flows from operating activities............. 23,145 21,956 20,203 20,212 21,900 Cash dividends paid ............................. 19,207 19,102 18,882 18,683 18,531 BASIC AND DILUTED EARNINGS PER SHARE DATA: Income before gains on sales of real estate investments and extraordinary item..... $0.56 $0.65 $0.61 $0.59 $0.70 Net income....................................... 0.75 0.72 0.61 0.92 0.70 Cash dividends paid.............................. 1.12 1.12 1.12 1.12 1.12 Weighted average number of shares outstanding -Basic.................. 17,144,674 17,055,496 16,861,324 16,682,675 16,548,198 Weighted average number of shares outstanding -Diluted................ 17,158,292 17,068,701 16,861,324 16,690,498 16,552,476 BALANCE SHEET DATA: Real estate properties (3)....................... $392,470 $384,550 $395,800 $389,094 $345,088 Total assets..................................... 337,521 339,629 344,571 347,172 309,345 Fixed-rate debt.................................. 124,766 111,207 114,609 116,961 67,500 Bank Line........................................ 19,100 32,250 29,250 23,645 33,244 Shareholders' equity............................. 186,249 191,948 196,799 202,684 204,938
(1) Revenues comprise minimum rents, percentage rents, recoveries from tenants and other income. (2) The Company 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 income from operations. For a further discussion of FFO, please refer to Management's Discussion and Analysis on page 21. (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, 1997, the Company owned three properties that are held for sale with an aggregate book value (before depreciation) of $5,382,000. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except share, percentage and per square foot information) INTRODUCTION The following discussion and analysis of the consolidated financial condition and results of operations of Western Investment Real Estate Trust (the Company) should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report on Form 10-K. Historical results and percentage relationships set forth herein are not necessarily indicative of future operations. CAUTIONARY STATEMENTS The discussions in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management's current views with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties including, but not limited to, the effects of future events on the Company's financial performance; the risk that the Company may be unable to finance its planned acquisition and development activities; risks related to the retail, commercial or industrial businesses in which the Company's properties compete, including the potential adverse impact of external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; risks associated with the Company's development activities, such as the potential for cost overruns, delays and lack of predictability with respect to the financial returns associated with these development activities; the risk of potential increase in market interest rates from current rates; and risk associated with real estate ownership, such as the potential adverse impact of environmental contamination or changes in the local economic climate on the revenues and the value of the Company's properties. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $23,145, $21,956 and $20,203, for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash used in investing activities was $3,740 for the year ended December 31, 1997. Included in this net amount are funds escrowed pending property acquisitions ($7,117), funds invested in improvements to real estate ($5,491), and a mortgage note receivable ($1,300). These investments were funded substantially with $10,135 of proceeds from the sale of five properties. Net cash used in financing activities was $18,894 for the year ended December 31, 1997. The principal use of these funds was for the redemption of the Company's 8% Convertible Debentures of $61,310 and a net paydown of the Company's unsecured bank line of credit (Bank Line) of $13,150. The primary source of these funds was the net proceeds from the Company's 1997 Senior Notes offering of $74,145. Dividends paid in 1997 of $19,207 were funded from operating cash flows of $23,145. 19 FINANCINGS - DEBT TRANSACTIONS 1997 SENIOR NOTES AND REDEMPTION OF THE CONVERTIBLE DEBENTURES - On September 25, 1997, the Company completed the sale of $75,000 of Senior Notes, comprising $25,000 of 7.10% Notes due 2006, $25,000 of 7.20% Notes due 2008, and $25,000 of 7.30% notes due 2010. The Notes were issued under the Company's $150,000 shelf registration. The outstanding balance under the Bank Line was paid off using a portion of the proceeds from the September 1997 sales of Senior Notes. On October 27, 1997, following a 30-day notification period, the $60,500 remaining balance of Convertible Debentures was redeemed using cash and cash equivalents as well as an advance on the Bank Line. The Company recognized an extraordinary loss of $1,620 from the redemption of the Convertible Debentures as a result of the write-off of the related unamortized deferred debt issuance costs. BANK LINE OF CREDIT - On August 8, 1997, the Company's Bank Line was amended to extend the maturity date to June 30, 2000. Previously, the maturity date on the Bank Line was May 31, 1998. On December 31, 1997, the Bank Line was increased from $45,000 to $55,000. The purpose of the Bank Line is to provide working capital to facilitate the funding of short-term operating cash needs of the Company including property acquisitions. The Bank Line bears interest at the London Interbank Offered Rate (LIBOR) plus 1.22%. At December 31, 1997, the balance outstanding was $19,100. The Company intends to renew or replace this facility when it expires on June 30, 2000. As of December 31, 1997, the Company's aggregate outstanding indebtedness of $143,866 consisted of $124,766 in fixed-rate, long-term Senior Notes and $19,100 of borrowings under the Company's variable-rate Bank Line. Any incurrence of debt by the Company, in excess of the Bank Line of $55,000 and the above-mentioned Senior Notes, would be subject to limitations imposed under the Company's Senior Notes and Bank Line. The Company's ratio of debt to undepreciated cost of real estate on December 31, 1997 was 36%. The Company's ratio of debt to total market capitalization [defined as the total of debt plus the Bank Line divided by the sum of: (a) the aggregate market value of the outstanding shares of beneficial interest and (b) the total debt plus the Bank Line of the Company] on December 31, 1997 was 38%. As of December 31, 1997, the Company has no debt that is secured by mortgages on its properties. However, if amounts due under the Bank Line are not paid at maturity, the lender, at its option, can require the Company to provide security interests in Company properties. The Company has an ownership interest in two properties where the co-owner is obligated under a note that is secured by the property. The Company 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. Cash on hand, proceeds from the sale of properties held for sale and borrowings under the Bank Line, as well as other debt and equity alternatives, are expected to provide the necessary funds to achieve future growth. 20 INCOME TAX STATUS AND TAXABILITY OF DIVIDENDS The Company 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 Company 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 so distributed. Management believes that the Company has qualified, and will continue to qualify, for tax purposes as a real estate investment trust. As the Company intends to distribute at least 95% of its taxable income, no provision is required to be made for federal or state income taxes in the accompanying financial statements. Federal taxable income of the Company prior to the dividend-paid deductions for the three years ended December 31, was: $14,327 in 1997; $16,187 in 1996; and $12,220 in 1995. 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 table below summarizes the taxability of distributions and dividends paid during the years ended December 31, 1997, 1996 and 1995.
Year Ended December 31, --------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------- Ordinary income................... 67.5% 80.2% 67.1% Return of capital................. 23.2% 12.6% 32.6% Capital gains..................... 9.3% 7.2% 0.3% --------------------------------------------------- Total............................. 100.0% 100.0% 100.0% --------------------------------------------------- ---------------------------------------------------
No assurances can be made that future dividends and distributions will be treated similarly. Each holder of stock may have a different basis in its stock and accordingly, each holder is advised to consult its tax advisors. FUNDS FROM OPERATIONS Industry analysts and the Company consider 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 income 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 Company, 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. 21 The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income calculated in accordance with generally accepted accounting principles (GAAP) plus depreciation and amortization of assets uniquely significant to the real estate industry, reduced by gains and increased by losses on (i) sales of property, and (ii) extraordinary items. FFO does not represent cash flows from operations as defined by GAAP and should not be considered a substitute for net income as an indicator of the Company's operating performance, or for cash flows as a measure of liquidity. Furthermore, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. The table below provides a reconciliation of net income in accordance with GAAP to FFO as calculated under the NAREIT 1995 guidelines for the years ended December 31, 1997, 1996 and 1995:
Year Ended December 31, ---------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Net Income......................................................... $12,880 $12,231 $10,304 Less: Gains on sales of real estate investments................. (4,898) (1,115) (47) Plus: Real property depreciation................................ 9,799 9,886 9,817 Amortization of tenant improvement costs.................. 826 836 631 Amortization of leasing commission costs.................. 323 436 312 Loss on early extinguishment of debt...................... 1,620 --- --- Management restructuring charge .......................... 1,842 --- --- ---------------------------------------------------- Funds From Operations.............................................. $22,392 $22,274 $21,017 ---------------------------------------------------- ----------------------------------------------------
The payout ratio for the years ended December 31, 1997, 1996 and 1995 (calculated as dividend distributions made by the Company for the applicable period divided by FFO), was 86%, 86% and 90%, respectively. FFO increased $118 to $22,392 in 1997 from $22,274 in 1996. During 1996, FFO increased $1,257 to $22,274, from the 1995 figure of $21,017 million. The 1996 increase of 6% is primarily the result of increased revenues and, to a lesser extent, reduced operating expenses. RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 Net income increased $649 to $12,880, or $0.75 per share (calculated using both basic and fully diluted weighted average shares outstanding), in 1997, from $12,231, or $0.72 per share (calculated using both basic and fully diluted weighted average shares outstanding), in 1996. This 5% increase in net income is principally due to the 1997 gains of $4,898 realized from the sale of five properties, partially offset by a $1,842 management restructuring charge and a $1,620 extraordinary loss resulting from the early extinguishment of debt. Other contributing factors to the increase include decreased other operating expenses and increased other income partially offset by decreased minimum rents and increased interest expense. 22 The Company continually assesses its portfolio for possible dispositions of properties that no longer fit its investment criteria due to limited prospects of growth in income, property type or other reasons. The properties sold in 1997 were three single-tenant retail properties, one multi-tenant retail property that was part of a large mixed-use center, and one small commercial property. As part of the 1997 management restructuring, participants of the Trustee Emeritus and Death and Disability Program have terminated their participation in this program. The significant portion of the management restructuring charge relates to this participation termination. The early extinguishment loss results from the write-off of deferred debt issuance costs relating to the October 1997 redemption of Convertible Debentures. Other operating expenses decreased $470 to $3,011 in 1997 from $3,481 in 1996. The most significant factor in this 14% decrease is a reduction in leasing and property management expenses. Other income increased $305 to $1,061 in 1997 from $756 in 1996, primarily due to the interest earned on short-term investment of a portion of the 1997 Senior Note sales proceeds until the Convertible Debentures were redeemed. Redemption occurred following a 30-day notification period to holders of the Convertible Debentures. Minimum rents decreased $396 to $37,845 in 1997 from $38,241 in 1996. This decrease primarily reflects the vacancy of the Petaluma property. The average occupancy for all property types at December 31, 1997 was 92.2% as compared with the December 31, 1996 percentage of 93.7%. Interest expense increased $222 to $11,511 in 1997 from $11,289 in 1996, primarily as a result of increased borrowings during the 30-day notification period prior to redeeming the Convertible Debentures, partially offset by reduced borrowings under the Bank Line and reduced interest rates. The following table provides information on interest costs for the years ended December 31, 1997, 1996 and 1995:
Year Ended December 31, ------------------------------------------------ 1997 1996 1995 ---------------------------------------------------------------------------------------------------------- Interest incurred....................................... $11,523 $11,417 $11,566 Interest capitalized.................................... 12 128 29 ------------------------------------------------ Interest expense........................................ $11,511 $11,289 $11,537 ------------------------------------------------ ------------------------------------------------ Interest paid........................................... $9,714 $11,217 $11,030 ------------------------------------------------ ------------------------------------------------ Weighted average interest rate on Bank Line............. 7.27% 7.33% 7.91%
23 COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 Net income increased $1,927 to $12,231, or $0.72 per share (calculated using both basic and fully diluted weighted average shares outstanding), in 1996, from $10,304, or $0.61 per share (calculated using both basic and fully diluted weighted average shares outstanding), in 1995. This 19% increase in net income is principally due to the 1996 gains of $1,115 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 to $38,241 in 1996 from $37,641 in 1995. This increase represents approximately 2% over the 1995 figure. The average occupancy for all property types at December 31, 1996 was 93.7% as compared with the December 31, 1995 percentage of 93.9%. Other income increased $172, or 29%, to $756 in 1996 from $584 in 1995. This increase is primarily the result of: (i) the $75 gain recorded on the sale of marketable securities held by the Company, and (ii) increased lease termination income of $60. Interest expense decreased $248, or 2%, from the 1995 figure of $11,537 to $11,289 in 1996. The main factors contributing to this decrease are: (i) the redemption of $2,250 of 8% Convertible Debentures during the year, and (ii) the decreased interest rate on the Bank Line. Other operating expenses decreased $121 to $3,481 in 1996 from $3,602 in 1995. This 3% decrease is primarily due to decreased spending for "additional" marketing funds. Additional marketing funds are in excess of the Company's contractually obligated contributions. Historically, certain shopping centers were targeted to benefit from these additional marketing funds until the shopping center obtained stabilization. INFLATION Substantially all of the Company's leases with tenants contain provisions that somewhat mitigate the impact of inflation. These provisions include, but are not limited to, clauses providing for increases in base rent and clauses enabling the Company to receive percentage rent based on tenants' gross sales. Additionally, substantially all leases require the tenant to pay their proportionate share of operating expenses, including common area maintenance and real estate taxes, thereby reducing the Company's exposure to increased costs and operating expenses resulting from inflation. Increases in interest rates could increase the Company's borrowing costs. As of December 31, 1997, the Company had $19,100 outstanding under its unsecured variable-rate Bank Line. This amount represents approximately 13% of the Company's total liabilities and approximately 5% of the Company's historical cost of real estate owned. 24 COMPUTER SYSTEMS AND THE MILLENNIUM As a result of computer programs being written using two digits (rather than four digits) to define the applicable year, many computer systems will not be able to process information beyond December 31, 1999. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. At December 31, 1997, a significant portion of the Company's Local Area Network and Wide Area Network are year 2000 compliant. The Company is currently evaluating appropriate courses of action, including replacement of certain computer systems, to upgrade its management information hardware and software to meet its current and anticipated future growth requirements. The Company expects to spend approximately $300 by the end of 1998 to acquire a new computer information system that will support planned future growth, increase efficiencies relating to Property Operations. These costs will be recorded as assets and amortized. Additionally, the Company has commenced a survey of its key tenants, vendors, banks and other parties the Company has significant business dealings with to determine if reliance on these external sources could interrupt Company operations. The Company expects to complete this survey and take corrective action by year-end 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The market capitalization of the Company on January 28, 1997 was less than $2.5 billion. As such, the Company will include the information required by Item 7A in the December 31, 1998 year-end filing with the Commission, pursuant to General Instruction 1 to Item 305 of Regulation S-K. 25 WESTERN INVESTMENT REAL ESTATE TRUST Financial Statements and Financial Statement Schedule Form 10-K Item 8 December 31, 1997 26 WESTERN INVESTMENT REAL ESTATE TRUST INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report 28 Balance Sheets - December 31, 1997 and 1996 29 Statements of Income - For the Years Ended December 31, 1997, 1996 and 1995 30 Statements of Shareholders' Equity - For the Years Ended December 31, 1997, 1996 and 1995 31 Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995 32 Notes to Financial Statements 33-45 Financial Statement Schedule III: Real Estate and Accumulated Depreciation 46-47
27 Independent Auditors' Report 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 Company'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, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, 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 January 29, 1998 F-1
BALANCE SHEETS WESTERN INVESTMENT REAL ESTATE TRUST - ------------------------------------------------------------------------------------------------------------------ December 31, ASSETS 1997 1996 -------------------------------------------------- (In thousands) Real estate investments: Real estate properties....................................................... $392,470 $384,550 Less accumulated depreciation and amortization............................... (77,642) (66,271) ----------- ----------- 314,828 318,279 Real estate properties held for sale......................................... 5,382 16,161 Less accumulated depreciation and amortization............................... (1,861) (5,525) ------------ ------------ 3,521 10,636 ----------- ---------- Net real estate investments............................................... 318,349 328,915 Cash and cash equivalents....................................................... 1,463 952 Accounts receivable, acquisition deposits, and other assets..................... 16,636 7,551 Deferred debt issuance costs, net............................................... 1,073 2,211 ----------- ----------- $337,521 $339,629 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Bank line....................................................................... $ 19,100 $32,250 Convertible debentures (note 7)................................................. --- 61,310 Senior notes, net (note 7)...................................................... 124,766 49,897 --------- ---------- 143,866 143,457 Interest payable................................................................ 2,917 1,477 Prepaid rents and security deposits............................................. 1,428 1,554 Other liabilities............................................................... 3,061 1,193 ----------- ------------ Total liabilities............................................................ 151,272 147,681 --------- ---------- Shareholders' equity: Preferred stock, 2,000,000 shares authorized; No shares issued or outstanding: --- --- Shares of beneficial interest, no par value, unlimited share authorization. Issued and outstanding: December 31, 1997 - 17,191,860 shares; December 31, 1996 - 17,138,432 shares..................................... 242,682 242,054 Accumulated dividends in excess of net income................................ (56,433) (50,106) ----------- ----------- Commitments and contingencies (notes 4, 7 and 14) Total shareholders' equity................................................... 186,249 191,948 --------- --------- $337,521 $339,629 ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-2
STATEMENTS OF INCOME WESTERN INVESTMENT REAL ESTATE TRUST - ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, ----------------------- 1997 1996 1995 ------------------ ---------------- ---------------- (In thousands, except per share and share data) REVENUES: Minimum rents....................................................... $37,845 $38,241 $37,641 Percentage rents.................................................... 552 649 559 Recoveries from tenants............................................. 8,093 8,143 7,506 Other income........................................................ 1,061 756 584 ------- ------- ------ Total revenues......................................................... 47,551 47,789 46,290 ------- ------- ------ EXPENSES: Interest............................................................ 11,511 11,289 11,537 Property operating costs............................................ 8,798 8,933 8,310 Depreciation and amortization....................................... 11,046 11,264 10,893 Other operating expenses............................................ 3,011 3,481 3,602 General and administrative.......................................... 1,741 1,706 1,691 Management restructuring charge..................................... 1,842 --- --- ------- ------- ------ Total expenses......................................................... 37,949 36,673 36,033 ------- ------- ------ Income before gains on sales of real estate investments and extraordinary item............................... 9,602 11,116 10,257 Gains on sales of real estate investments........................... 4,898 1,115 47 ------- ------- ------ Income before extraordinary item.................................... 14,500 12,231 10,304 Extraordinary item - loss on early extinguishment of debt........... (1,620) --- --- ------- ------- ------ Net income.......................................................... $12,880 $12,231 $10,304 ------- ------- ------ ------- ------- ------ Basic and diluted earnings per share data: Income before gains on sales of real estate investments and extraordinary item............................... $ 0.56 $ 0.65 $ 0.61 ------- ------- ------ ------- ------- ------ Gains on sales of real estate investments........................... $ 0.28 $ 0.07 $ -0- ------- ------- ------ ------- ------- ------ Income before extraordinary item.................................... $ 0.84 $ 0.72 $ 0.61 ------- ------- ------ ------- ------- ------ Extraordinary item - loss on early extinguishment of debt........... $(0.09) $ -0- $ -0- ------- ------- ------ ------- ------- ------ Net income.......................................................... $ 0.75 $ 0.72 $ 0.61 ------- ------- ------ ------- ------- ------ Cash dividends paid.................................................... $ 1.12 $ 1.12 $ 1.12 ------- ------- ------ ------- ------- ------ Weighted average number of shares outstanding-Basic.................... 17,144,674 17,055,496 16,861,324 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares outstanding-Diluted.................. 17,158,292 17,068,701 16,861,324 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-3
STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN INVESTMENT REAL ESTATE TRUST - --------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997, 1996 and 1995 (In thousands, except share data) Accumulated Shares of Dividends Total Beneficial Interest in Excess of Share- ------------------- Net holders' Number Amount Income Equity ------ ------ ------ ------ Balance, January 1, 1995............................. 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 Net proceeds from issuance of shares................. 53,160 622 --- 622 Debenture redemptions................................ 268 6 --- 6 Net income........................................... --- --- 12,880 12,880 Cash dividends paid.................................. --- --- (19,207) (19,207) ---------------- -------------- ---------- ----------- BALANCE, DECEMBER 31, 1997 17,191,860 $242,682 $(56,433) $186,249 ---------------- -------------- ---------- ----------- ---------------- -------------- ---------- -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-4
STATEMENTS OF CASH FLOWS WESTERN INVESTMENT REAL ESTATE TRUST - --------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, ----------------------- 1997 1996 1995 ---------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................................... $ 12,880 $ 12,231 $ 10,304 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................... 11,046 11,264 10,893 Amortization of deferred debt issuance costs..................... 369 365 391 Gains on sales of real estate investments........................ (4,898) (1,115) (47) Loss on early extinguishment of debt............................. 1,620 --- --- Increase in accounts receivable and other assets................. (550) (279) (304) Increase in deferred rent receivable............................. (471) (797) (1,065) (Increase) decrease in interest payable.......................... 1,440 (164) 144 Increase (decrease) in prepaid rents, security deposits and other liabilities....................... 1,709 451 (113) --------- -------- --------- Net cash provided by operating activities........................ 23,145 21,956 20,203 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of real estate investments...................... 10,135 1,371 168 Proceeds from sale of marketable securities......................... --- 234 --- Investment in mortgage note receivable.............................. (1,300) --- --- (Acquisitions) recovery of acquisition costs of real estate investments...................................................... (283) 36 (3,278) Funds escrowed pending acquisition.................................. (7,117) --- (168) Improvements of real estate investments: Build-to-suit developments....................................... (1,561) (4,239) (1,056) New leases....................................................... (3,264) (1,707) (2,544) General.......................................................... (666) (192) (676) Recovery of investment in direct financing leases................... 316 272 236 --------- -------- --------- Net cash used in investing activities............................ (3,740) (4,225) (7,318) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances on bank line............................................... 50,050 40,468 39,650 Principal payments on bank line..................................... (63,200) (37,468) (34,045) Principal payments on real estate loan payable...................... --- (1,294) (68) Redemption of convertible debentures................................ (61,310) (40) (45) Net proceeds from issuance of shares................................ 628 --- 514 Net proceeds from senior notes offering............................. 74,145 --- --- Cash dividends paid................................................. (19,207) (19,102) (18,882) --------- -------- --------- Net cash used in financing activities............................ (18,894) (17,436) (12,876) --------- -------- --------- Net increase in cash and cash equivalents........................ 511 295 9 Cash and cash equivalents, at beginning of period...................... 952 657 648 --------- -------- --------- Cash and cash equivalents, at end of period............................ $ 1,463 $ 952 $ 657 --------- -------- --------- --------- -------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest.............................. $ 9,714 $ 11,217 $ 11,030 -------- --------- --------- -------- --------- ---------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-5 WESTERN INVESTMENT REAL ESTATE TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share, percentage and per square foot information) Note 1: ORGANIZATION AND BASIS OF PRESENTATION AND RECENT ACCOUNTING PROUNCEMENTS (A) Description of Organization Founded in 1962, Western Investment Real Estate Trust (The Company) is a self-administered and self-managed real estate investment trust (REIT). As such, the Company engages in ownership, development, construction, acquisition, leasing, marketing and management of neighborhood and community shopping centers, commercial office buildings and industrial properties located in Northern California and Northern Nevada. At December 31, 1997, the Company's real estate portfolio comprised 53 properties, 42 of which were retail properties. (B) Basis of Presentation and Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) 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. Certain prior year financial statement amounts and related footnote information have been reclassified to conform with the current year presentation. (C) Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued FASB No. 130, "REPORTING COMPREHENSIVE INCOME" and FASB No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." These statements are effective for periods beginning after December 15, 1997; as such, the Company will adopt FASB 130 and 131 during the first quarter of 1998. For the year ended December 31, 1997 and 1996, the effect of applying these statements would not have been material. Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REAL ESTATE INVESTMENTS Properties comprising real estate investments are carried at the lower of depreciated cost or fair value. Acquisition and development costs, which include fees and costs incurred in acquiring or developing new properties, are capitalized as incurred. Upon completion of acquisition or construction, these costs are depreciated over the useful lives of the respective properties on a straight-line basis. The estimated useful lives for these properties range from 20 to 45 years for buildings and 2 to 31 years for improvements. F-6 The Company has adopted FASB No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." Accordingly, in the normal course of the Company's business, when it determines that a property should be disposed of, the Company will discontinue the periodic depreciation of that property. 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 value of that asset is made. If the fair value is less than the carrying value of that asset, an impairment charge is recognized. No impairment losses have been recorded in the years ended December 31, 1997, 1996 or 1995. Included in real estate investments are net investments in two direct financing leases. The net investment comprises the aggregate minimum lease payments to be received over the terms of the leases, plus an estimated residual value, less unearned income. Expenditures for ordinary maintenance and repairs are expensed as incurred. Significant renovations and improvements that enhance and/or extend the useful life of the property are capitalized and depreciated over its estimated useful life. LEASING COMMISSIONS AND LEASING-RELATED COSTS Direct, incremental leasing commissions and leasing related costs are capitalized and amortized over the respective terms of the associated leases. The following table provides a reconciliation of leasing commissions and leasing-related costs:
Year Ended December 31, -------------------------------------------------------------------- 1997 1996 1995 -------------------------------------------------------------------- Balance at beginning of year...................... $1,587 $1,673 $1,484 Additions..................................... 366 350 501 Amortization.................................. (323) (436) (312) -------------------------------------------------------------------- Balance at end of year............................ $1,630 $1,587 $1,673 -------------------------------------------------------------------- --------------------------------------------------------------------
RENTAL INCOME The Company accrues base rental income (minimum contractual lease payments) as earned. Certain of the Company'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 Company recognizes income from deferred rental receivables in accordance with FASB No. 13, "ACCOUNTING FOR LEASES." Deferred rent receivable recognized as income was $471 in 1997, $797 in 1996 and $1,065 in 1995. CASH EQUIVALENTS Cash equivalents comprise certain highly liquid investments with original maturities of less than three months. F-7 DEFERRED DEBT ISSUANCE COSTS Deferred debt issuance costs comprise the costs incurred in connection with the issuance of debt. These costs are amortized over the term of the associated debt instruments. Note 3: REAL ESTATE INVESTMENTS The following table provides a reconciliation of real estate properties, properties held for sale and the related accumulated depreciation and amortization for each:
Year Ended December 31, ----------------------- 1997 1996 1995 ---------------------------------------------------- REAL ESTATE PROPERTIES: Balance at beginning of year........................................ $384,550 $395,800 $389,094 Increases: Acquisitions ........................................ 288 --- 3,278 Improvements......................................... 4,878 5,788 3,775 Properties reclassified from held for sale........... 3,070 --- --- Decreases: Properties reclassified as held for sale............. --- (16,161) --- Dispositions......................................... --- (569) (111) Recovery of acquisition costs........................ --- (36) --- Amortization of direct financing leases.............. (316) (272) (236) --------- -------- -------- Balance at end of year.............................................. $392,470 $384,550 $395,800 --------- -------- -------- --------- -------- -------- Accumulated depreciation and amortization: Balance at beginning of year........................................ $ 66,271 $ 61,249 $ 50,802 Increases: Additions charged to operations...................... 10,625 10,722 10,447 Accumulated depreciation of properties reclassified from held for sale..................... 746 --- --- Decreases: Dispositions......................................... --- (175) --- Accumulated depreciation of properties held for sale....................................... --- (5,525) --- --------- -------- -------- Balance at end of year.............................................. $ 77,642 $ 66,271 $ 61,249 --------- -------- -------- --------- -------- -------- REAL ESTATE PROPERTIES HELD FOR SALE: Balance at beginning of year........................................ $ 16,161 $ -0- $ -0- Increases: Improvements......................................... 29 --- --- Properties reclassified as held for sale............. -- 16,161 --- Decreases: Properties removed from market....................... (3,070) --- --- Dispositions......................................... (7,738) --- --- --------- -------- -------- Balance at end of year.............................................. $ 5,382 $ 16,161 $ -0- --------- -------- -------- --------- -------- -------- Accumulated depreciation and amortization: Balance at beginning of year........................................ $ 5,525 $ -0- $ -0- Increases: Accumulated depreciation of properties reclassified as held for sale....................... --- 5,525 --- Decreases: Accumulated depreciation of properties removed from market................................. (746) --- --- Dispositions......................................... (2,918) --- --- --------- -------- -------- Balance at end of year.............................................. $ 1,861 $ 5,525 $ -0- --------- -------- -------- --------- -------- --------
F-8 At December 31, 1997, the Company owned three properties that were held for sale. These properties total 91,000 leasable square feet and have a net aggregate carrying value of $3,521. During the year ended December 31, 1997, Management changed its intention to dispose of two properties. Subsequently, these properties were removed from the "held for sale" classification. As of December 31, 1997, the Company had no debt that is secured by mortgages on its properties. However, if amounts due under the Bank Line are not paid at maturity, the lender, at its option, can require the Company to provide security interests in Company properties. The Company has an ownership interest in two properties where the co-owner is obligated under a note that is secured by the property. Most of the Company's leases require the tenant to be responsible for, or reimburse the Company for liability insurance coverage on the properties. The Company maintains umbrella liability insurance on all of its properties and monitors tenant compliance with liability insurance coverage requirements. While the Company believes its properties are adequately insured, the Company 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 Company's properties are located in areas of California and Nevada where earthquakes have been known to occur. In the event of a major earthquake, Company properties could suffer substantial damage or destruction. Since it commenced real estate operations in 1964, the Company has not incurred any material expense nor, to its knowledge, have any of its properties incurred any material damage from earthquakes or floods. The Company periodically considers the merits of purchasing earthquake insurance. To date the Company has not purchased earthquake insurance because of: (i) the high premiums and deductibles and (ii) the Company'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 consist of relatively new, single-story buildings. F-9 Note 4: CAPITAL EXPENDITURES It is the Company's practice to capitalize costs which exceed $4 and are associated with the improvement and rental of real estate investments. Capitalized costs include leasing-related costs and property improvements. Capital expenditures for the twelve months ended December 31, 1997, and 1996 are as follows:
Twelve Months Ended December 31, ------------------------------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------------------- "Build to Suit" capital improvements............................... $1,561 $4,239 Capitalized costs incurred in connection with leasing previously UNLEASED space................................................. 142 169 Capitalized costs incurred in connection with leasing previously LEASED space................................................... 3,122 1,538 Capitalized costs which relate to improvements to common areas.......................................................... 666 192 ------ ------ Total capitalized expenditures..................................... $5,491 $6,138 ------ ------ ------ ------ Improvements....................................................... $4,907 $5,788 Leasing-related costs.............................................. 584 350 ------ ------ Total capitalized expenditures................................. $5,491 $6,138 ------ ------ ------ ------
During the year ended December 31, 1997, the Company entered into new leases that obligate the Company to fund leasing commissions, tenant improvements and build-to-suit developments. These obligations relate both to new leases and lease renewals, a portion of which were funded during 1997 and are reflected in the preceding table. In addition, a portion remains an obligation of the Company at December 31, 1997. F-10 The aggregate and per square foot information is as follows: - --------------------------------------------------------------------------------
NEW LEASES Tenant Leasing Build to Suit Improvements Commissions ------------- ------------ ----------- Per Per Per Aggregate Square Aggregate Square Aggregate Square Property Type Amount Foot Amount Foot Amount Foot ------------- --------- ------ --------- ------ --------- ------ Shopping Centers and Retail Properties $1,423 $114.38 $1,658 $11.22 $387 $2.56 Commercial --- --- --- --- --- --- Industrial --- --- 13 $ 0.65 32 $1.58
- --------------------------------------------------------------------------------
RENEWAL LEASES Tenant Leasing Improvements Commissions ------------ ----------- Per Per Aggregate Square Aggregate Square Property Type Amount Foot Amount Foot ------------- --------- ------ --------- ------ Shopping Centers & Retail Properties $53 $3.77 $49 $1.07 Commercial --- --- --- --- Industrial --- --- --- ---
- -------------------------------------------------------------------------------- Note 5: 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, 1997, are as follows: 1998 $ 36,695 1999 34,127 2000 31,605 2001 28,126 2002 25,859 Thereafter 212,811 -------- Total $369,223 -------- --------
F-11 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, 1997, are as follows:
1998 $ 469 1999 212 2000 189 2001 189 2002 189 Thereafter 142 ------ Total $1,390 ------ ------
At December 31, 1997, the Company's investment in direct financing leases was $1,481, and was calculated by adding the estimated residual value of $383 to the total remaining minimum lease payments of $1,390, less unearned income of $292. The original cost of the properties subject to these direct financing leases is $4,449. Included in other income is income recorded under direct financing leases of $155, $197 and $233 in 1997, 1996 and 1995, respectively. Note 6: MAJOR TENANT Total revenues attributable to leases with Raley's, a grocery and drug retailer, the Company's most significant tenant, were $9,178, $9,382 and $9,009 in 1997, 1996 and 1995, respectively. These amounts represented 19%, 20% and 20% of total revenues during 1997, 1996 and 1995, respectively. Note 7: NOTES PAYABLE BANK LINE OF CREDIT At December 31, 1997, the Company had $19,100 outstanding under its $55,000 unsecured bank line of credit (the Bank Line). Interest on funds drawn under the Bank Line is LIBOR plus 1.22% and is payable monthly on any outstanding balance. In addition, the Company pays an annual fee of one quarter of one percent (.25%) of the total commitment. The Company is not required to pledge any assets or maintain compensating balances for this line of credit, although the Company 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 Company to provide security interests in Company properties. The Company intends to renew or replace this facility before it expires on June 30, 2000. CONVERTIBLE DEBENTURES In 1988, the Company issued $75,000 of 8% Convertible Debentures due in 2008. On October 27, 1997, following a 30-day notification period, the Company's 8% Convertible Debentures, with a $60,500 principal balance, were redeemed using cash and cash equivalents as well as an advance on the Bank Line. The Company recognized an extraordinary loss of $1,620 from the extinguishment of the Convertible Debentures as a result of the write-off of the related unamortized deferred debt issuance costs. F-12 SENIOR NOTES In February 1994, the Company sold $50,000 of unsecured Senior Notes (the 1994 Notes) in a public offering. The 1994 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 1994 Notes are not redeemable prior to maturity. In September 1997, the Company sold $75,000 of unsecured Senior Notes (the 1997 Notes) in a public offering, comprising $25,000 due 2006, $25,000 due 2008 and $25,000 due 2010. The 1997 Notes were issued under the Company's $150,000 shelf registration. The outstanding balance under the Bank Line was paid off using a portion of the proceeds from the sale of the 1997 Notes. On October 27, 1997, the $60,500 principal balance of Convertible Debentures was redeemed using cash and cash equivalents as well as an advance on the Bank Line. All Senior Notes outstanding at December 31, 1997 are summarized in the following table:
Net Amount Coupon Interest Rate Due Date Years to Maturity ----------------------------------------------------------------------------------------------------- $ 49,911 7.875% February 15, 2004 6 24,966 7.100% September 15, 2006 9 24,943 7.200% September 15, 2008 11 24,946 7.300% September 15, 2010 13 --------- Total/Weighted Average $ 124,766 7.470% 9 --------- ------ -- --------- ------ --
As of December 31, 1997, the Senior Notes carried "investment grade" ratings from Moody's Investor Service (Baa3) and Standard & Poor's (BBB-). Note 8: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS FASB No. 107 requires disclosure about fair value for all financial instruments. The Company believes that the carrying amount approximates fair value for cash and cash equivalents, the Bank Line, and prepaid rents and security deposits. The fair value of the Company's Convertible Debentures and Senior Notes are based on quoted market prices. The estimated fair values of the Company's financial instruments as of December 31 are stated in the following table:
1997 1996 -------------------------------------------------------------------------- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value -------------------------------------------------------------------------- Cash and cash equivalents............................ $ 1,463 $ 1,463 $ 952 $ 952 Bank line ........................................... $19,100 $19,100 $32,250 $32,250 Convertible debentures .............................. --- --- 61,310 61,310 Senior notes ........................................ 124,766 125,848 49,897 50,938 Prepaid rents and security deposits.................. 1,428 1,428 1,554 1,554
F-13 Note 9: MANAGEMENT RESTRUCTURING CHARGE During the fourth quarter of 1997, the Company recorded a $1,842 management restructuring charge as a result of changes in management and related compensation arrangements. This non-recurring management restructuring charge of $1,842 principally relates to agreements the Company entered into whereby three individuals agreed to withdraw from the Company's Trustee Emeritus Program and the Death and Disability Program (collectively the Programs). In exchange for agreeing to withdraw from these Programs and relieving the Company and the Program participants from their respective obligations under the Programs, the three individuals will receive annual payments of $60 from the Company for as long as each individual or his eligible spouse lives. The obligation was calculated using a 7% discount rate. Note 10: STOCK OPTION PLAN In May 1988, the Company 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 Company's share option plan during the three years ended December 31, 1997, is summarized in the following table:
Shares Available Options Weighted for Future Granted and Average Options Grants Outstanding Exercise Price - --------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------- Exercised --- (53,160) $11.72 Expired 9,040 (9,040) $12.45 Granted (36,300) 36,300 $13.59 - --------------------------------------------------------------------------------------------------------------------- 12/31/97, BALANCE 580 246,100 $13.02 - ---------------------------------------------------------------------------------------------------------------------
F-14 The following table summarizes information about the Company's fixed price stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------ ---------------------------------- Number of Weighted Weighted Weighted Options Average average average Range of outstanding at Remaining exercise exercise Exercise Prices December 31, 1997 Contractual life price Options price - ------------------------------------------------------------------------------------------------------------------------------ $11.00 - $13.81 246,100 3.28 years $13.02 121,000 $13.09
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has adopted FASB No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and has elected to continue to follow Accounting Principles Board Opinion 25 to account for stock based compensation and to make the disclosures set forth below as required by FASB No. 123. Consequently, the Company has recorded no compensation costs related to its stock options granted during 1997, 1996 and 1995. The pro-forma effects on net income and net income per-share data as if the Company had elected to use the fair value approach to account for its employee stock-based compensation plans are as follows:
YEAR ENDED Year ended Year ended DECEMBER 31, 1997 December 31, 1996 December 31, 1995 --------------------------------------------------------------------------------------- As Adjusted As Adjusted As Adjusted Reported Pro-Forma Reported Pro-Forma Reported Pro-Forma ---------------------------------------------------------------------------------------- Net Income $12,880 $12,852 $12,231 $12,214 $10,304 $10,302 Per share net income $0.75 $0.75 $0.72 $0.72 $0.61 $0.61
The weighted average fair value per option granted during the year ended December 31, 1997, 1996 and 1995, was $1.58, $1.69 and $1.11, respectively. The exercise price of options granted was the market price on the date of grant. The following assumptions were used for the options granted in 1997, 1996 and 1995, respectively: risk-free interest rate of 5.86%, 6.05% and 5.80%; forfeiture rate, 8.6%, 7.4% and 6.2%; share-volatility rate, 21.1%, 21.9% and 22.7%; and dividend yield 8.18%, 8.37% and 10.30%. Note 11: DIVIDEND REINVESTMENT PLAN In accordance with the Dividend Reinvestment and Share Purchase Plan adopted by the Company in 1990, $699 in dividend reinvestment proceeds were used to purchase shares in the open market for shareholders during 1997. During 1996, $706 in dividend reinvestment proceeds were used to purchase shares in the open market for the shareholders. F-15 During 1995, the Company received $514 net of issuance costs and issued 43,575 shares of beneficial interest. Additionally, $184 in dividend reinvestment proceeds were used to purchase shares in the open market for the shareholders in 1995. Note 12: EARNINGS PER SHARE In February 1997, the FASB issued FASB No. 128, "EARNINGS PER SHARE." The purpose of this pronouncement is to show the effect of the exercise of certain options and other convertible securities on earnings per share. A reconciliation of the denominator used in the calculation of "DILUTED EARNINGS PER SHARE" for the year ended December 31, 1997, 1996 and 1995 is shown below:
Year Ended December 31, ---------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding............................... 17,144,674 17,055,496 16,861,324 Plus: Options with exercise prices below year-end market price of common stock ............................. 13,618 13,205 -0- ---------------------------------------------------- Adjusted weighted average shares outstanding...................... 17,158,292 17,068,701 16,861,324
Additionally, during the years 1997, 1996 and 1995, the Company had Convertible Debentures outstanding. The principal balance of all debentures outstanding was redeemed during October 1997. The principal balance of the debentures at December 31, 1996 and 1995 was $61,310 and $63,433, respectively, and was convertible prior to maturity at a conversion price equal to $22.23 per share. Hypothetical conversion of these debentures had the effect of increasing earnings per share for 1997, 1996 and 1995, and as such, conversion was not assumed in the above calculation. F-16 Note 13: QUARTERLY RESULTS OF OPERATIONS The following is a summary of quarterly financial information for the last two years:
Quarters Unaudited ------------------------------------------------------------- (In thousands, except per share and share data) First Second Third Fourth - ---------------------------------------------------------------------------------------------------------------------------- 1997 - ---- TOTAL REVENUES................................................ $11,141 $12,304 $11,506 $12,600 ------- ------- ------- ------- ------- ------- ------- ------- INCOME BEFORE GAINS ON SALES OF REAL ESTATE INVESTMENTS AND EXTRAORDINARY ITEM.................. $ 2,789 $ 2,877 $ 2,966 $ 970 ------- ------- ------- ------- ------- ------- ------- ------- NET INCOME.................................................... $ 2,789 $ 4,037 $ 5,703 $ 351 ------- ------- ------- ------- ------- ------- ------- ------- BASIC AND DILUTED EARNINGS PER SHARE.......................... $0.16 $0.24 $0.33 $0.02 DIVIDENDS..................................................... $0.28 $0.28 $0.28 $0.28 WEIGHTED AVERAGE NUMBER OF SHARES-BASIC....................... 17,138,432 17,138,432 17,139,075 17,162,553 WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED..................... 17,146,080 17,162,114 17,157,978 17,176,171 1996 - ---- Total revenues................................................ $11,319 $12,222 $11,940 $12,308 ------- ------- ------- ------- ------- ------- ------- ------- Income before gains on sales of real estate investments and extraordinary item.................. $ 2,816 $ 2,837 $ 2,711 $ 2,752 ------- ------- ------- ------- ------- ------- ------- ------- Net income.................................................... $ 2,816 $ 3,869 $ 2,794 $ 2,752 ------- ------- ------- ------- ------- ------- ------- ------- Basic and diluted earnings per share.......................... $0.17 $0.23 $0.16 $0.16 Dividends..................................................... $0.28 $0.28 $0.28 $0.28 Weighted average number of shares-Basic....................... 16,972,496 16,972,496 17,136,774 17,138,432 Weighted average number of shares-Diluted..................... 16,972,867 16,986,322 17,146,182 17,151,637
Note 14: COMMITMENTS AND CONTINGENCIES The Company identifies and evaluates prospective investments on a continuous basis. In connection therewith, the Company initiates letters of interest and extends offers on a regular basis. At December 31, 1997, the Company was committed to fund $34,950 of acquisitions. As of December 31, 1997, the Company has entered into several new leases that call for approximately $795 in future real estate improvements and leasing commissions. The Company expects to pay these expenditures from operating cash flows or from borrowings under the Bank Line. The Company 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 Company's financial statements. F-17 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 Company's properties, the Company and/or others may be held strictly liable for all costs and liabilities relating to the clean-up of such hazardous substances. The Company carries no insurance coverage expressly for this type of environmental risk. Note 15: SUBSEQUENT EVENTS On January 21, 1998, the Company purchased a 214,770 square foot community shopping center located in Modesto, California. The Company acquired this property for $17,500. The Company used $7,117 in proceeds from the recent sale of two properties, drawing on the Bank Line for additional funds. In late January, 1998, the Company was in the final stages of negotiating a 126,500-square-foot neighborhood shopping center located in Windsor, California. The Company will acquire this property for $20,930. This shopping center will be purchased using funds drawn on the Bank Line and the assumption of a $10,165 existing mortgage. This mortgage will have a fixed interest rate of 7.61%, will be due 2004, and will amortize over 22 years. The Company expects to close this purchase on February 9, 1998. F-18
WESTERN INVESTMENT REAL ESTATE TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (DECEMBER 31, 1997 IN THOUSANDS EXCEPT FOR DATES ON 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 - ---------------------- Anderson Square, Anderson, CA 1,145 2,125 0 367 Angel's Camp Town Center, Angels Camp, CA 580 4,447 0 129 Skypark Plaza Shopping Center, Chico, CA 2,854 10,454 0 2,064 Coalinga Shopping Center, Coalinga, CA 816 2,144 0 937 Serra Center, Colma, CA (30% interest)(1) 433 914 0 347 Mercantile Row Shopping Center, Dinuba, CA 1,440 6,208 0 61 Luckys, El Cerrito, CA $250 $450 $0 $625 Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,194 0 (8) Northridge Shopping Center, Fair Oaks, CA 1,666 6,830 0 (69) Commonwealth Square Shopping Center, Folsom, CA 3,312 13,022 0 804 Victorian Walk Shopping Center, Fresno, CA 1,120 7,356 0 204 Country Gables Shopping Center, Granite Bay, CA 2,704 12,684 0 659 Pinecreek Shopping Center, Grass Valley, CA (50% interest)(2) 2,725 7,966 0 111 Heritage Oak Shopping Center, Gridley, CA 1,603 3,597 0 100 Centennial Plaza Shopping Center, Hanford, CA 2,225 8,935 0 83 Nob Hill General Stores, Hollister, CA 960 3,869 0 0 Plaza 580 Shopping Center, Livermore, CA 2,941 11,768 403 674 Canal Farms Shopping Center, Los Banos, CA 1,180 6,904 0 594 Mission Ridge Shopping Center, Manteca, CA 2,373 9,552 0 153 Kmart, Napa, CA Nob Hill General Stores, Newman, CA 626 2,535 0 0 Currier Square Shopping Center, Oroville, CA 2,025 7,203 0 743 Eastridge Plaza Shopping Center, Porterville, CA 939 4,390 0 60 Belle Mill Landing, Red Bluff, CA 2,247 6,043 0 1,866 Cobblestone Shopping Center, Redding, CA 2,375 7,969 0 185 Kmart Center, Sacramento, CA 1,875 3,116 0 570 Elverta Crossing Shopping Center, Sacramento, CA 3,370 7,477 0 671 Heritage Park Shopping Center, Suisun, CA 3,575 12,187 0 385 Heritage Place Shopping Center, Tulare, CA 1,427 7,117 0 475 Blossom Valley Plaza, Turlock, CA 2,448 8,315 0 411 Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,119 0 327 Park Place Shopping Center, Vallejo, CA 3,850 11,291 109 1,059 Nob Hill General Stores, Watsonville, CA 416 1,084 0 0 Yreka Junction, Yreka, CA 1,350 5,846 288 1,082 Raley's Shopping Center, Yuba City, CA 2,101 5,151 0 1,392 Eagle Station Shopping Center, Carson City, NV 1,735 7,585 0 168 Elko Junction Shopping Center, Elko, NV 2,516 7,631 (184) 6,255 Dodge Center, Fallon, NV (3) 405 1,595 0 32 - ------------------------------------------------------------------------------------------------------------------------ Column E - ------------------------------------------------------------------------------------------------------------------------ Gross amount at which carried at close of period. - ------------------------------------------------------------------------------------------------------------------------ Properties Operating under Direct Buildings and Financing Land Improvements Leases Total - ------------------------------------------------------------------------------------------------------------------------ Shopping Center/Retail - ---------------------- Anderson Square, Anderson, CA 1,145 2,492 3,637 Angel's Camp Town Center, Angels Camp, CA 580 4,576 5,156 Skypark Plaza Shopping Center, Chico, CA 2,854 12,518 15,372 Coalinga Shopping Center, Coalinga, CA 816 3,081 3,897 Serra Center, Colma, CA (30% interest)(1) 433 1,261 1,694 Mercantile Row Shopping Center, Dinuba, CA 1,440 6,269 7,709 Luckys, El Cerrito, CA $250 $1,075 $1,325 Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,186 13,977 Northridge Shopping Center, Fair Oaks, CA 1,666 6,761 8,427 Commonwealth Square Shopping Center, Folsom, CA 3,312 13,826 17,138 Victorian Walk Shopping Center, Fresno, CA 1,120 7,560 8,680 Country Gables Shopping Center, Granite Bay, CA 2,704 13,343 16,047 Pinecreek Shopping Center, Grass Valley, CA (50% interest)(2) 2,725 8,077 10,802 Heritage Oak Shopping Center, Gridley, CA 1,603 3,697 5,300 Centennial Plaza Shopping Center, Hanford, CA 2,225 9,018 11,243 Nob Hill General Stores, Hollister, CA 960 3,869 4,829 Plaza 580 Shopping Center, Livermore, CA 3,344 12,442 15,786 Canal Farms Shopping Center, Los Banos, CA 1,180 7,498 8,678 Mission Ridge Shopping Center, Manteca, CA 2,373 9,705 12,078 Kmart, Napa, CA 0 386 386 Nob Hill General Stores, Newman, CA 626 2,535 3,161 Currier Square Shopping Center, Oroville, CA 2,025 7,946 9,971 Eastridge Plaza Shopping Center, Porterville, CA 939 4,450 5,389 Belle Mill Landing, Red Bluff, CA 2,247 7,909 10,156 Cobblestone Shopping Center, Redding, CA 2,375 8,154 10,529 Kmart Center, Sacramento, CA 1,875 3,686 5,561 Elverta Crossing Shopping Center, Sacramento, CA 3,370 8,148 11,518 Heritage Park Shopping Center, Suisun, CA 3,575 12,572 16,147 Heritage Place Shopping Center, Tulare, CA 1,427 7,592 9,019 Blossom Valley Plaza, Turlock, CA 2,448 8,726 11,174 Ukiah Crossroads Shopping Center, Ukiah, CA 1,925 8,446 10,371 Park Place Shopping Center, Vallejo, CA 3,959 12,350 16,309 Nob Hill General Stores, Watsonville, CA 416 1,084 1,500 Yreka Junction, Yreka, CA 1,638 6,928 8,566 Raley's Shopping Center, Yuba City, CA 2,101 6,543 8,644 Eagle Station Shopping Center, Carson City, NV 1,735 7,753 9,488 Elko Junction Shopping Center, Elko, NV 2,332 13,886 16,218 Dodge Center, Fallon, NV (3) 405 1,627 2,032 - ------------------------------------------------------------------------------------------------------------------------ Column F Column G Column H Column I - ------------------------------------------------------------------------------------------------------------------------ Life on which depreciation in the latest income Accumulated Date of Date statement is Depreciation Construction Acquired computed - ------------------------------------------------------------------------------------------------------------------------ Shopping Center/Retail - ---------------------- Anderson Square, Anderson, CA 831 1979 1987 5 to 31 Angel's Camp Town Center, Angels Camp, CA 1,645 1986 1985 2 to 31 Skypark Plaza Shopping Center, Chico, CA 3,482 1985/1991 1988 3 to 31 Coalinga Shopping Center, Coalinga, CA 1,137 1977 1987 3 to 31 Serra Center, Colma, CA (30% interest)(1) 744 1972 1973/1988 8 to 31 Mercantile Row Shopping Center, Dinuba, CA 1,433 1990 1990 3 to 31 Luckys, El Cerrito, CA 760 1964/1983 1964 31 Laguna 99 Shopping Center, Elk Grove, CA 1,307 1993 1994 5 to 31 Northridge Shopping Center, Fair Oaks, CA 826 1958/1986 1994 5 to 31 Commonwealth Square Shopping Center, Folsom, CA 3,277 1988/1997 1990 3 to 31 Victorian Walk Shopping Center, Fresno, CA 2,210 1988 1988 3 to 31 Country Gables Shopping Center, Granite Bay, CA 2,949 1988 1991 2 to 31 Pinecreek Shopping Center, Grass Valley, CA (50% interest)(2) 2,352 1988 1989 5 to 31 Heritage Oak Shopping Center, Gridley, CA 1,239 1981 1987 10 to 31 Centennial Plaza Shopping Center, Hanford, CA 1,031 1991 1994 3 to 31 Nob Hill General Stores, Hollister, CA 388 1994 1994 31 Plaza 580 Shopping Center, Livermore, CA 1,393 1993/1996 1994/1996 4 to 31 Canal Farms Shopping Center, Los Banos, CA 2,350 1988 1986 3 to 32 Mission Ridge Shopping Center, Manteca, CA 1,109 1993 1994 5 to31 Kmart, Napa, CA N/A 1964 1966 N/A Nob Hill General Stores, Newman, CA 235 1995 1995 31 Currier Square Shopping Center, Oroville, CA 2,175 1969/1989 1989 5 to 31 Eastridge Plaza Shopping Center, Porterville, CA 1,604 1985 1985 3 to 35 Belle Mill Landing, Red Bluff, CA 2,365 1982/1987/1994 1987 3 to 31 Cobblestone Shopping Center, Redding, CA 2,548 1984 1988 3 to 31 Kmart Center, Sacramento, CA 1,304 1964/1986 1986 4 to 31 Elverta Crossing Shopping Center, Sacramento, CA 1,698 1991/1993 1990 3 to 31 Heritage Park Shopping Center, Suisun, CA 3,112 1989 1990 3 to31 Heritage Place Shopping Center, Tulare, CA 2,591 1986 1987 5 to 31 Blossom Valley Plaza, Turlock, CA 2,077 1988/1991 1990 3 to 31 Ukiah Crossroads Shopping Center, Ukiah, CA 2,364 1986 1989 3 to 31 Park Place Shopping Center, Vallejo, CA 3,031 1987 1990 4 to 31 Nob Hill General Stores, Watsonville, CA 664 1982 1982 25 Yreka Junction, Yreka, CA 1,838 1984/1997 1990/1997 5 to 31 Raley's Shopping Center, Yuba City, CA 1,913 1963/1984 1986 5 to 40 Eagle Station Shopping Center, Carson City, NV 2,093 1982 1989 3 to 31 1986/1991/1994 Elko Junction Shopping Center, Elko, NV 2,479 1996/1997 1988/1993 5 to 31 Dodge Center, Fallon, NV (3) 1,224 1976 1977 24 to 31 continued on next page F-19 - -------------------------------------------------------------------------------------------------------------------- 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 - ---------------------- Raley's Supermarket, Fallon, NV 1,000 3,220 0 0 Caughlin Ranch Shopping Center, Reno, NV 2,950 7,123 0 388 North Hills Shopping Center, Reno, NV 5,406 6,911 0 71 West Town, Winnemuca, NV 130 3,386 0 0 ---------------------------------------------------------- Total Shopping Center/Retail 0 77,809 265,713 616 23,975 Industrial - ---------- Viking Freight Systems, Santa Clara, CA 548 0 0 0 Old Dominion, Commerce City, CO (3) 278 648 0 276 ---------------------------------------------------------- Total Industrial 0 826 648 0 276 Commercial - ---------- Coast Savings & Loan, Cupertino, CA 615 845 0 0 Heald Business College, Milpitas, CA 979 6,020 0 684 Coast Savings & Loan, Monterey, CA 911 2,189 0 0 Redwood II, Petaluma, CA 1,017 3,052 0 0 Coast Savings & Loan, Salinas, CA (3) 516 1,632 0 0 Coast Savings & Loan (Market St), San Francisco, CA 873 1,068 0 0 Coast Savings & Loan (Taraval St), San Francisco, CA 366 1,824 0 0 3450 California St., San Francisco, CA 1,450 1,159 0 279 Coast Savings & Loan, Santa Cruz, CA 205 823 0 0 ---------------------------------------------------------- Total Commercial 0 6,932 18,612 0 963 ---------------------------------------------------------- Total All Properties $0 $85,567 $284,973 $616 $25,214 ---------------------------------------------------------- ---------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Column E - ----------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period. - ----------------------------------------------------------------------------------------------------------------------- Properties Operating under Direct Buildings and Financing Land Improvements Leases Total - ----------------------------------------------------------------------------------------------------------------------- Raley's Supermarket, Fallon, NV 1,000 3,220 4,220 Caughlin Ranch Shopping Center, Reno, NV 2,950 7,511 10,461 North Hills Shopping Center, Reno, NV 5,406 6,982 12,388 West Town, Winnemuca, NV 130 3,386 3,516 ----------------------------------------------------------------- Total Shopping Center/Retail 78,425 289,688 386 368,499 Industrial - ---------- Viking Freight Systems, Santa Clara, CA 548 0 1,096 1,644 Old Dominion, Commerce City, CO (3) 278 924 1,202 ----------------------------------------------------------------- Total Industrial 826 924 1,096 2,846 Commercial - ---------- Coast Savings & Loan, Cupertino, CA 615 845 1,460 Heald Business College, Milpitas, CA 979 6,704 7,683 Coast Savings & Loan, Monterey, CA 911 2,189 3,100 Redwood II, Petaluma, CA 1,017 3,052 4,069 Coast Savings & Loan, Salinas, CA (3) 516 1,632 2,148 Coast Savings & Loan (Market St), San Francisco, CA 873 1,068 1,941 Coast Savings & Loan (Taraval St), San Francisco, CA 366 1,824 2,190 3450 California St., San Francisco, CA 1,450 1,438 2,888 Coast Savings & Loan, Santa Cruz, CA 205 823 1,028 ----------------------------------------------------------------- Total Commercial 6,932 19,575 0 26,507 ------------------------------------------------------------------ Total All Properties $86,183 $310,187 $1,482 $397,852 ------------------------------------------------------------------ ------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Column F Column G Column H Column I - ------------------------------------------------------------------------------------------------------------------------ Life on which depreciation in the latest income Accumulated Date of Date statement is Depreciation Construction Acquired computed - ------------------------------------------------------------------------------------------------------------------------ Shopping Center/Retail - ---------------------- Raley's Supermarket, Fallon, NV 718 1991 1991 31 Caughlin Ranch Shopping Center, Reno, NV 1,624 1990/1991 1990 3 to 31 North Hills Shopping Center, Reno, NV 2,175 1986 1988/1993 3 to 31 West Town, Winnemuca, NV 1,755 1978/1991 1978 25 to 31 ---------- Total Shopping Center/Retail 72,050 Industrial - ---------- Viking Freight Systems, Santa Clara, CA N/A 1978 1978 N/A Old Dominion, Commerce City, CO (3) 208 1984 1984 24 to 35 ---------- Total Industrial 208 Commercial - ---------- Coast Savings & Loan, Cupertino, CA 414 1980 1985 25 Heald Business College, Milpitas, CA 2,189 1987 1987 10 to 31 Coast Savings & Loan, Monterey, CA 1,051 1963 1985 25 Redwood II, Petaluma, CA 870 1985 1989 31 Coast Savings & Loan, Salinas, CA (3) 429 1937 1986 40 Coast Savings & Loan (Market St), San Francisco, CA 513 1964 1986 25 Coast Savings & Loan (Taraval St), San Francisco, CA 876 1975 1985 25 3450 California St., San Francisco, CA 665 1957/1987 1987 10 to 31 Coast Savings & Loan, Santa Cruz, CA 238 1980 1986 40 ---------- Total Commercial 7,245 ---------- Total All Properties $79,503 ---------- ----------
(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, 1997 as follows: Basis for federal income tax purposes $308,979 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 $60 -------- Financial statement reporting basis $310,187 -------- --------
continued on next page F-20 WESTERN INVESTMENT REAL ESTATE TRUST 1997 BUILDING IMPROVEMENT AND LEASING RELATED COST ADDITIONS
BUILDING LEASING NAME LOCATION IMPROVEMENT RELATED COST - ---- -------- ----------- ------------ SHOPPING CENTERS / RETAIL ------------------------- ANDERSON SQUARE ANDERSON, CA $11 $3 SKYPARK PLAZA CHICO, CA 634 18 COALINGA COALINGA, CA 51 - SERRA CENTER (30%) COLMA, CA 297 16 LAGUNA 99 PLAZA ELK GROVE, CA 1 15 NORTHRIDGE FAIR OAKS, CA 12 - COMMONWEALTH SQUARE FOLSOM, CA 674 69 VICTORIAN WALK FRESNO, CA 5 2 COUNTRY GABLES GRANITE BAY, CA 255 27 PINECREEK (50%) GRASS VALLEY, CA 0 6 HERITAGE OAK GRIDLEY, CA 7 5 CENTENNIAL PLAZA HANFORD, CA 5 8 PLAZA 580 LIVERMORE, CA 77 30 CANAL FARMS LOS BANOS, CA 89 12 MISSION RIDGE PLAZA MANTECA, CA 120 18 SAN ANTONIO CENTER MOUNTAIN VIEW, CA 16 1 CURRIER SQUARE OROVILLE, CA 4 2 EASTRIDGE PLAZA PORTERVILLE, CA 6 3 BELLE MILL LANDING RED BLUFF, CA 53 12 COBBLESTONE REDDING, CA 19 14 ELVERTA CROSSING SACRAMENTO, CA 32 23 KMART CENTER SACRAMENTO, CA 38 4 HERITAGE PARK SUISUN, CA 107 33 HERITAGE PLACE TULARE, CA 234 38 BLOSSOM VALLEY PLAZA TURLOCK, CA 19 7 CROSSROADS UKIAH, CA - 2 PARK PLACE VALLEJO, CA 62 21 YREKA JUNCTION YREKA, CA 637 40 RALEY'S CENTER YUBA CITY, CA 235 3 EAGLE STATION CARSON CITY, NV 16 9 ELKO JUNCTION ELKO, NV 1,115 62 CAUGHLIN RANCH RENO, NV 53 34 NORTH HILLS RENO, NV 10 11 ------ ----- SUBTOTAL - SHOPPING CENTERS / RETAIL $4,894 $ 548 ------ ----- INDUSTRIAL ---------- OLD DOMINION FREIGHT COMMERCE CITY, CO 13 36 ------ ----- SUBTOTAL - COMMERCIAL $ 13 $ 36 ------ ----- TOTAL $4,907 $ 584 ------ ----- ------ -----
48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. There have been no disagreements with the independent accountants on the Company's accounting and financial disclosure. Additionally, there has been no change of the independent accountant engaged to audit the Company'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 Company is incorporated by reference to the section entitled "Trustees and Executive Officers" of the Company's definitive Proxy Statement in connection with the annual Meeting of Shareholders to be held May 14, 1998, 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 or Arrangements", "Stock Option Grants and Exercises" and "Report of Compensation Committee on Executive Compensation" of the Company's definitive Proxy Statement in connection with the annual Meeting of Shareholders to be held May 14, 1998, 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 "Ownership of Shares" of the Company's definitive Proxy Statement in connection with the annual Meeting of Shareholders to be held May 14, 1998, 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 Company, its employees, officers or trustees are not engaged in any related transactions with the Company. As of December 31, 1997, the Company had not made any loans to its management. 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page ---- (a) 1. Financial Statements - Included in Item 8 Report of Independent Certified Public Accountants 28 Balance Sheets - December 31, 1997 and 1996 29 Financial Statements for the Years Ended December 31, 1997, 1996 and 1995: Statements of Income 30 Statements of Shareholders' Equity 31 Statements of Cash Flows 32 Notes to Financial Statements 33-35 2. Financial Statement Schedule III: Real Estate and Accumulated Depreciation 46-47 3. Additional Information: 1997 Building Improvement and Leasing Related Cost Additions (unaudited) 48 (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. 333-32721 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). 50 (4.4) Form of Supplemental Indenture relating to the 7.1% Senior Notes (filed as Exhibit 4.5 on Form 8-K, dated September 24, 1997, and incorporated herein by reference). (4.5) Form of Supplemental Indenture relating to the 7.2% Senior Notes (filed as Exhibit 4.6 on Form 8-K, dated September 24, 1997, and incorporated herein by reference). (4.6) Form of Supplemental Indenture relating to the 7.3% Senior Notes (filed as Exhibit 4.7 on Form 8-K, dated September 24, 1997, and incorporated herein by reference. (10.1)** Company'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)** Company's Trustee Emeritus Plan (filed as an Exhibit to Proxy Statement dated March 25, 1986, and incorporated herein by reference. (10.3)* Compensation Agreement (23) * Consent of Independent Certified Public Accountants 52 (27) Financial Data Schedule
- ---------- * Filed with this report. ** Management contract or compensatory plan or arrangement. 51 Consent of Independent Certified Public Accountants The Trustees Western Investment Real Estate Trust: We consent to incorporation by reference in the registration statement (No. 33-71270) on Form S-3 and the registration statement (No. 33-27016) on Form S-8 of Western Investment Real Estate Trust of our report dated January 29, 1998, relating to the balance sheets of Western Investment Real Estate Trust as of December 31, 1997 and 1996, and the related statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and the related financial statement schedule, which report appears in the December 31, 1997, annual report on Form 10-K of Western Investment Real Estate Trust. KPMG PEAT MARWICK LLP San Francisco, California January 29, 1998 52 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 30, 1998 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/ Chester R. MacPhee, Jr. Acting Chairman March 30, 1998 - ---------------------------- of the Board Chester R. MacPhee, Jr. and Trustee /s/ Bradley N. Blake President, Chief March 30, 1998 - ---------------------------- Executive Officer Bradley N. Blake and Trustee /s/ Dennis D. Ryan Executive Vice March 30, 1998 - ---------------------------- President, Chief Dennis D. Ryan Financial Officer and Trustee /s/ Robert J. McLaughlin Trustee March 30, 1998 - ---------------------------- Robert J. McLaughlin /s/ Reginald B. Oliver Trustee March 30, 1998 - ---------------------------- Reginald B. Oliver /s/ James L. Stell Trustee March 30, 1998 - ---------------------------- James L. Stell
53 EX-10.3 2 EX 10.3 COMPENSATION AGREEMENT This Compensation Agreement (the "Agreement") is entered into as of December 31, 1997 (the "Effective Date") by and between Western Investment Real Estate Trust (the "Trust") and O.A. Talmage (the "Recipient") with reference to the following: A. The Trust has currently in effect a Trustee Emeritus Program and a Death and Disability Program (together, the "Programs") in which the Recipient has participated or may be eligible to participate. B. In exchange for the Recipient's withdrawal from and renouncing of eligibility for such Programs, the Trust agrees to enter into this Agreement. NOW, THEREFORE, the parties agree as follows: 1.1 WITHDRAWAL FROM THE PROGRAMS. The parties acknowledge that, as of the Effective Date, the Recipient has elected to participate in the Programs or may become entitled to participate in the Programs in the future. The Recipient hereby (a) agrees to be excluded from eligibility in either Program, (b) terminates any current participation in either Program, and (c) quitclaims and releases any and all of his present or future rights, title and interest in and to the benefits under either Program. In exchange for such promises, the Trust shall provide the Recipient with the benefits set forth in this Agreement. 1.2 COMPENSATION. The Trust shall pay the Recipient a monthly stipend equal to five thousand dollars ($5,000) commencing on January 1, 1998 and continuing until the Recipient dies or an accelerated payment is made pursuant to Section 1.4. 1.3 BENEFITS UPON THE DEATH OF THE RECIPIENT. Upon the death of the Recipient, the Trust shall pay a monthly benefit equal to five thousand dollars ($5,000) to the spouse of the Recipient as of the Effective Date ("eligible spouse"). If the Recipient dies without leaving an eligible spouse, no death benefit payments will be due from the Trust to anyone under this Agreement. Death benefits shall be paid beginning the first day of the month following the death of the Recipient and continuing until the death of his eligible spouse or an accelerated payment is made pursuant to Section 1.4. 1.4 ACCELERATED PAYMENTS. (a) If the net assets of the Trust (as reported in its financial statements prepared in accordance with generally accepted accounting principles) fall below fifteen million dollars ($15,000,000) (a "Net Asset Value Event"), the Trust shall pay the Recipient or his eligible spouse, as the case may be, an amount equal to the sum of the Present Value Amount and the Tax Coverage Amount. Accelerated payments under this Section 1.4 shall be made within sixty (60) days after the occurrence of a Net Asset Value Event. For purposes of this agreement: present value shall be determined based on a discount rate of seven percent (7%) per annum over the Life Expectancy Period; "Life Expectancy Period" shall mean the greater of the life expectancy of such Recipient or his eligible spouse, as of the date upon which the Net Asset Value Event occurs, determined according to the 1983 Group Annuity Mortality Table (as published in IRS Revenue Ruling 95-6); "Present Value Amount" shall mean an amount equal to the present value of the total amount the Recipient or his eligible spouse, as applicable, would have received under the provisions of Sections 1.2 or 1.3 if the Net Asset Value Event had not occurred; "Tax Factor" shall mean one less forty-five percent (45%); and "Tax Coverage Amount" shall mean an amount equal (i) to the quotient of the Present Value Amount made pursuant to this Section 1.4 divided by the Tax Factor, less (ii) the Present Value Amount. An application of the formula to determine an accelerated payment under this Section 1.4(a) is as follows: The Tax Factor equals 55% (1 minus 45%). If the Present Value Amount were $600,000, the Present Value Amount and the Tax Factor would yield a "Tax Coverage Amount" of $490,909, calculated as follows: First, the Present Value Amount ($600,000) divided by the Tax Factor (55%) equals $1,090,909. Second, $1,090,909 minus the Present Value Amount ($600,000) equals a Tax Coverage Amount of $490,909. Thus, the total payment to the Recipient in this example is the Present Value Amount ($600,000) plus the Tax Coverage Amount ($490,909) for a total payment to the Recipient of $1,090,909. (b) The Trust represents and warrants for the benefit of Recipient, his eligible spouse and their respective successors and assigns, that any accelerated payment made under this Section 1.4 will not constitute an "excess parachute payment" for purposes of Internal Revenue Code Sections 280G and 4999. This representation shall survive and continue beyond the Effective Date of this Agreement. Any breach of this representation shall constitute a breach of this Agreement by the Trust and shall entitle the Recipient, his eligible spouse or their respective successors and assigns to receive from the Trust, or its successors or assigns, all damages that result from such breach. 1.5 NO ASSIGNMENT. Payments under this Agreement shall be paid only to or for the benefit of the persons entitled thereto. No person shall have any right whatsoever to anticipate, assign or in any manner encumber or hypothecate any benefit under this Agreement, or subject the same to any creditor's claim or legal process, prior to actual payment to the payee otherwise entitled to such payment. 1.6 BINDING EFFECT. The terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the successors and permitted assigns of the parties as set forth herein, but are not intended, nor shall this Agreement be construed, to confer any enforceable rights on any person not a party hereto. 1.7 ENTIRE AGREEMENT. This instrument contains the entire agreement between the parties with respect to the subject matter hereof, supersedes any and all prior negotiations, correspondence, understandings and agreements between the parties with respect to the subject matter hereof, including the Programs, and may be modified only by a written instrument executed by all parties hereto. 1.8 ATTORNEYS FEES. In any litigation between the parties to this Agreement, arising under or relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and expenses of litigation incurred. 1.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 1.10 GOVERNING LAW. The provisions of this Agreement shall be construed in accordance with, and governed by, the laws of the State of California. -2- 1.11 HEADINGS. The headings of the paragraphs herein are included for purposes of convenience only, and shall not affect the construction or interpretation of this Agreement in any manner. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the day and year first above written. WESTERN INVESTMENT REAL ESTATE TRUST RECIPIENT By: ---------------------------- --------------------------- Title: Name: O. A. Talmage -------------------------- ELIGIBLE SPOUSE By: ---------------------------- --------------------------- Title: Name: -------------------------- ---------------------- -3- EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND BALANCE SHEET AT DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,463 0 0 0 0 0 392,470 77,642 337,521 0 143,866 0 0 242,682 (56,433) 337,521 0 47,551 0 11,809 12,787 0 11,511 14,500 0 14,500 0 1,620 0 (12,880) 0.75 0.75 Amount insignificant. Balance Sheet is not classified. Amount represents accumulated dividends in excess of net income. Amount comprised of Property Operating Costs (8,798) and Other Operating Expenses (3,011). Amount comprised of Depreciation expense (11,046) and General and Administrative expense (1,741). Exercise of the convertible debentures would not have material effect on earnings per share. The convertible debentures were redeemed during October, 1997.
-----END PRIVACY-ENHANCED MESSAGE-----