Item 1. Business
GENERAL DEVELOPMENT OF BUSINESS
Western Investment Real Estate Trust is a real estate investment trust ("REIT") and qualifies as such under Sections 856 and 960 of the Internal Revenue Code. The Trust was organized under the laws of the State of California in 1962 and commenced real estate operations in 1964.
In order that the Trust may continue to qualify as a real estate investment trust: (i) more than 75% of the Trust's total assets must be invested in real estate, cash, cash items or government securities, (ii) at least 75% of the Trust's gross income must be derived from real estate assets, (iii) the Trust can hold no property primarily for sale to customers in the ordinary course of business, (iv) beneficial ownership of the Trust must be held by more than 100 persons during at least 335 days of each taxable year, and (v) the Trust must distribute annually to its shareholders an amount equal to or exceeding 95% of its real estate investment trust taxable income. Under the terms of its Declaration of Trust, the Trust is permitted to invest its funds in ownership of real estate, mortgages, deeds of trust and certain financial instruments as permitted by law. Substantially all of the Trust's funds have been invested in the ownership of real estate.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Trust is not engaged in different segments of a business nor is the Trust engaged in more than one line of business.
NARRATIVE DESCRIPTION OF BUSINESS
The Trust, which at December 31, 1993 employed 43 people, is a self-administered and fully integrated equity REIT, which invests in a diversified portfolio of income-producing properties located principally in Northern and Central California and Nevada. At December 31, 1993, the Trust had investments in 58 income-producing properties. These properties contain, in the aggregate, approximately 4.4 million rentable square feet of improvements and approximately 19.8 million square feet of land. At year end, the occupancy rate of the Trust's properties was 90%. Of the amounts invested by the Trust at December 31, 1993, 88% is in shopping centers and retail properties with the balance in commercial and industrial properties. The Trust has not invested in residential income properties.
The following table indicates the composition of the Trust's real estate investments as of December 31, 1993 by type based on amounts invested by the Trust.
Portfolio Summary DECEMBER 31, 1993
Portfolio Distribution by Type of Real Estate Investment
Major Revenue Producers 1993 OPERATING REVENUES
In spite of a sluggish California economy, the Trust's occupancy rate at year- end was stable at 90% in 1993 and 1992. The Trust believes that it was unable to increase occupancy above this rate during this period due to the economy coupled with overbuilding in certain areas in which Trust properties are located. The smaller retail and service tenants at the Trust's community shopping centers, which tend to be more dependent on discretionary spending, have been more negatively impacted by the economy than the Trust's anchor tenants. The anchor tenants consist primarily of supermarkets and/or super drugstores. In the Trust's experience, these businesses tend to be impacted less by economic downturns than other types of retailers.
The Trust is positioned to benefit from a general economic improvement which should result in increased occupancy. As occupancy increases, the Trust's rental income should increase and expenses should decrease, as more tenants assume responsibility for common area and other expenses presently absorbed by the Trust. Increased tenants' sales at its community shopping centers should also increase rental income by generating greater percentage rents under some leases.
During the past several years, volume discount retailers, such as Wal-Mart and Costco, have entered certain areas of California and Nevada where Trust community shopping center properties are located. The Trust expects that these discounters may positively or negatively affect certain of the Trust's shopping center tenants. The Trust believes that its tenants could benefit if these discounters attract additional customers to nearby Trust properties and thereby generate increased sales for Trust tenants. Conversely, the Trust's tenants could be negatively affected if discounters draw customers away from the Trust's properties. The Trust believes that to date the trend has had no measurable impact on the Trust's results of operations.
The Trust's principal shopping center and retail tenants include substantial, well-recognized businesses such as Kmart, Lucky Stores, Marshall's, J.C. Penney, Raley's, Ross Stores, Save Mart and Thrifty. The Trust's commercial tenants include Coast Federal Bank and Fireman's Fund.
No single property investment accounted for more than 5% of operating revenues in 1993. However, at December 31, 1993, Raley's, a supermarket and super drug retailer, was a tenant in nineteen of the Trust's investments. Raley's, a privately owned company, currently operates 85 stores in Northern California and Nevada. The Raley's organization has released information indicating that its sales exceeded $1.58 billion in its most recently reported fiscal year ended June 26, 1993. The Trust receives sales and other information on a monthly, quarterly or annual basis from its retail tenants, including Raley's, whose leases provide for such reports. The Trust uses this information to monitor the payment of percentage rents. Virtually all of the Trust's existing leases include at least one of the following provisions for payment of additional rent: (1) scheduled and/or market rate increases, (2) percentage participation in tenants'gross sales, (3) or CPI based escalation clauses. The Trust endeavors to structure leases on a triple net basis with the lessees being responsible for most operating expenses, such as real estate taxes, certain types of insurance, utilities, normal repairs and maintenance. To the extent such provisions cannot be negotiated and in regard to vacant space, the Trust pays such expenses from current operating income. Most of the Trust's leases require the tenant to carry liability insurance coverage on their leased premises. The Trust monitors tenant compliance with insurance coverage requirements. While the Trust believes its properties are adequately insured, the Trust does not carry earthquake or flood coverage. Most of the Trust's properties are located in areas of California and Nevada where earthquakes have been known to occur.
The Trust will consider future investments in existing or proposed shopping centers, industrial and commercial buildings and office buildings, as well as other kinds of income-producing properties which meet the Trust's return on investment, appreciation and risk criteria. The Trust may enter into development agreements and development mortgage loans in order to obtain future equity interests in properties. As of December 31, 1993, no such loans were outstanding. Although there may be attendant risks in such investments, the Trust seeks to minimize these risks by evaluating the financial substance and experience of developers and by obtaining construction, pre-leasing or other guarantees from the developer or other parties to the transaction. If a developer of a project under construction defaults or fails to complete the project, the Trust may incur substantial additional expense to complete construction.
The Trust's investment focus has been in the Northern and Central areas of California and Nevada, generally outside of major cities in areas which are experiencing population growth. All but one of the Trust's properties are in this geographic area. The Trust's geographic focus and its experience in real estate investments in Northern California and Nevada allow for efficient asset management. The Trust has made and will consider making investments in other geographic locations if such investments have attractive returns, appreciation potential and can be effectively managed.
The Trust competes for quality properties with other investors and engages in a continuing effort to identify desirable properties for acquisition. Management believes that the Trust can continue to compete effectively in the current real estate environment because of its experience in real estate investment, tenant selection and lease negotiation.
The Trust plans to make additional investments in real properties, which will provide attractive yields to the Trust. The Trust has raised approximately $127.5 million during the five year period ending March 31, 1994 through the sale of additional shares and the issuance of senior notes, and will endeavor to raise additional capital, either debt or equity, to fund future purchases. The cost of debt or equity capital will be weighed against the anticipated yields of the investments which could be acquired with those funds.
POTENTIAL ENVIRONMENTAL RISKS
Investments in real property create a potential for environmental liability on the part of the owner of such real property. If hazardous substances are discovered on or emanating from any of the Trust's properties, the Trust and/or others may be held strictly liable for all costs and liabilities relating to the clean-up of such hazardous substances.
The Trust, as far as it is aware, owns only four properties which presently contain underground storage tanks. The Trust has no knowledge of any leakage or contamination resulting from these tanks. There are, however, reported low levels of soil contamination from underground storage tanks removed from the Heritage Place Shopping center in Tulare, California prior to its acquisition by the Trust. In addition, there is a potential for contamination from reported off-site leaking petroleum underground storage tanks located on properties adjacent to certain Trust properties.
In order to mitigate environmental risks, in 1989 the Trust adopted a policy of requesting 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. No independent environmental analysis has been implemented by the Trust with respect to any of the properties which the Trust acquired prior to 1989. Although the Trust has no knowledge that any material environmental contamination has occurred, no assurance can be given that hazardous substances are not located under any of the properties. The Trust carries no express insurance coverage for the type of environmental risk described above.
The Trust assesses on an ongoing basis measures necessary to comply with environmental laws and regulations. The probable overall costs of these measures cannot be determined at this time due to uncertainty about the extent of environmental risks and the Trust's responsibility, the complexity of environmental laws and regulations and the selection of alternative compliance approaches. However, the Trust is not aware of any environmental conditions which will have a material impact on its financial position or results of operations.
ASSET MANAGEMENT
The Trust is a fully integrated REIT which directly provides full asset management services to all but three of its properties. Asset management includes property management, leasing, marketing, accounting and legal support. Internal management provides for regular interaction between the Trust and its tenants and close supervision of properties, while permitting the Trust to provide its tenants with a range of value added services.
The Trust directly manages 55 of its 58 properties. In order to facilitate its present and future asset management activities the Trust has significantly expanded its asset management staff, improved its systems and controls, and opened two branch offices which are centrally located to the properties. The offices are located at the Trust's Country Gables shopping center in Granite Bay, California and at the Victorian Walk shopping center in Fresno, California. As part of its improved systems and controls, the Trust has implemented a state of the art computerized management information system which is capable of providing the Trust with real time access to all property accounting, lease administration and property related information.
Internal management permits the Trust to provide value added services to its tenants. For example, the Trust's marketing staff works with the Trust's tenants on promotional and advertising activities to draw consumers to the shopping centers. These activities help the Trust attract and retain the national, regional, and local retail tenants which serve the Northern and Central California and Nevada markets. In addition, the Trust believes that over time the costs of internal property management and leasing should prove less expensive than employing independent property management and leasing firms due to lower commissions and fees and certain economies of scale.
Three of the 58 properties are managed by independent property managers. G & W Management Co. continues to provide management services for the property leased to Fireman's Fund Insurance Company, in Petaluma, California, for fees equal to 3.5% of gross receipts. The Trust's property is a part of a larger office park which is managed in total 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 4% of gross receipts attributable to the Trust's 30% interest in the center. CRES is an affiliate of the co-owner of the Serra Center and has been managing the property for approximately 20 years. The Trust and its co-owner have authorized the employment of Terranomics Management Services to manage Mid-Peninsula Plaza, in Redwood City, California for a fee equal to 6% of gross receipts. The cost of management services does not affect the Trust's priority return on this property. None of the above named property managers are affiliated with the Trust, its trustees, officers or any shareholder owning 5% or more of the Trust's shares. Repairs and maintenance of the Trust's properties not undertaken by tenants under the terms of the Trust's triple net leases are performed by independent contractors not affiliated with the Trust, its trustees or officers, or any shareholder owning 5% or more of the Trust's shares.
Item 2:


Item 2: Properties
Item 3.
Item 3. Legal Proceedings
The Trust was named a defendant in two (2) lawsuits filed in the Second Judicial District Court for the State of Nevada, County of Washoe. One action was a class action (Gomer vs. Realm Development Corp. et al., No. CV90-6108) and the other was brought by 33 individuals (Bautista vs. Shaver Construction Co., Inc., No. CV92-01464). Plaintiffs in both lawsuits alleged that they suffered personal injury and/or property damage as the result of excessive dust generated from construction of the Caughlin Ranch development in Reno, Nevada. The Trust has reached a settlement in regard to these lawsuits involving a payment of $25,000 to the plaintiffs.
On January 11, 1993, a complaint was filed by the United States against the Trust and other defendants with regard to an alleged disturbance of the wetlands at the Park Place shopping center in Vallejo, California (U.S. vs. Connolly Development Inc., et al., U.S. District Court, E.D. Cal No. S-93-044, WBS-GGH). The complaint sought implementation of a restoration plan, assessment of civil penalties, a permanent injunction prohibiting the discharge of fill materials into the wetlands, and the government's costs of suit and disbursements. This lawsuit has been settled by the execution of a consent decree under which the developer of the property is primarily liable for penalties and costs of restoration, and the action was dismissed against the Trust on February 11, 1994. However, the Trust has agreed to guarantee the performance of the restoration by, and to provide a loan to, the developer. In the event of a default by the developer, the Trust's exposure could be as much as $250,000.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Principal Market:
The shares of beneficial interest, without par value, of the Trust are listed on the American Stock Exchange under the symbol "WIR". The following table sets forth the high and low sales prices of the shares as reported by the American Stock Exchange:
Approximate number of equity security holders:
Title of Class Number of Record Holders -------------- ------------------------ (as of December 31, 1993)
Shares of Beneficial Interest, without par value 2,688
The Trust estimates that there were over 18,000 beneficial owners of shares, including owners whose shares were held in brokerage and trust accounts.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OPERATING REVENUES
YEARS ENDED DECEMBER 31, 1993 AND 1992
Rental income increased 5% to $33,179,000 from $31,716,000. The increase consists of additional rental income of $851,000 from increased rental rates and collection of prior year rents and $612,000 of deferred rent receivable.
Operating revenues increased 3% to $33,813,000 from $32,879,000 as a result of increased rental income of $1,463,000 (5%), partially offset by decreased interest income on mortgage loans of $506,000 (-2%) and decreased direct financing lease income of $23,000.
YEARS ENDED DECEMBER 31, 1992 AND 1991
Rental income increased 2% to $31,716,000 from $31,220,000. The increase consists of $1,149,000 (5%) in rental income generated from properties acquired in 1991, $443,000 (2%) in rental income generated from the conversion of a loan on a property in 1991, and increased rental income of $405,000 (1%) due to increased rents and other income and collections from bankruptcy settlements of two previous tenants, offset by a decrease of $1,344,000 (-5%) in rental income due to the restructuring of master leases covering 17 of the Trust's shopping center properties and a decrease of $157,000 (-1%) due to the increase in the allowance for uncollectible accounts.
Operating revenues increased 1% to $32,879,000 from $32,591,000 as a result of increased rental income of $496,000 (2%), partially offset by decreased interest income on participating convertible and other mortgage loans of $188,000 (-1%) and decreased direct financing lease income of $20,000.
OPERATING EXPENSES
YEARS ENDED DECEMBER 31, 1993 AND 1992
Operating expenses increased 17% to $3,936,000 from $3,357,000. The increase consists of $19,000 of increased repair, maintenance and other operating expenses and increased property management expense of $560,000 (17%) due primarily to the increase in allocated administrative expense and the development of internal asset management capabilities which include leasing, marketing and property management.
YEARS ENDED DECEMBER 31, 1992 AND 1991
Operating expenses increased 85% to $3,357,000 from $1,810,000. The increase consists of $905,000 (50%) of increased repair, maintenance, and other operating expenses and increased property management expense of $642,000 (35%) due primarily to the restructuring of master leases covering 17 of the Trust's shopping center properties and the reclassification of certain administrative expenses to operating expenses in 1992.
DEPRECIATION AND AMORTIZATION
YEARS ENDED DECEMBER 31, 1993 AND 1992
Depreciation and amortization expense increased 5% to $9,078,000 from $8,610,000 due to additional depreciation from property improvements made in 1993 and a full year's depreciation from property improvements made in 1992.
YEARS ENDED DECEMBER 31, 1992 AND 1991
Depreciation and amortization expense increased 9% to $8,610,000 from $7,880,000 due to additional depreciation from improvements on properties in 1992 and a full year's depreciation on properties purchased in 1991.
DEBENTURE AND OTHER INTEREST EXPENSE
YEARS ENDED DECEMBER 31, 1993 AND 1992
Debenture and other interest expense decreased $146,000 (-2%) primarily due to debenture redemptions during 1993.
YEARS ENDED DECEMBER 31, 1992 AND 1991
Debenture and other interest expense increased $1,155,000 (17%) primarily due to decreased capitalization of interest costs for projects under development in 1992 and increased levels of bank borrowings in 1992 as compared to 1991 offset in part by debenture redemptions.
ADMINISTRATIVE EXPENSES
YEARS ENDED DECEMBER 31, 1993 AND 1992
The Trust's administrative expenses decreased 14% to $1,449,000 from $1,681,000. The decrease is principally due to substantially lower legal fees and to the allocation of certain administrative expenses to property management expenses.
YEARS ENDED DECEMBER 31, 1992 AND 1991
The Trust's administrative expenses increased 11% to $1,681,000 from $1,510,000 primarily as the result of increased legal fees and other expenses, offset in part by a reallocation of certain administrative expenses to property management expenses.
NET INCOME
YEARS ENDED DECEMBER 31, 1993 AND 1992
Net income was $11,594,000 in 1993 compared to $11,323,000 in 1992, an increase of $271,000 (2%). The significant components of this change include increased rental income ($1,463,000), offset by decreased interest on mortgage loans (-$506,000), and increased property management expense (-$560,000). Additional significant components affecting net income are reduced legal fees ($218,000) and increased depreciation and amortization expense (-$468,000).
Net income per share for the year ended December 31, 1993 increased to $0.70 on average outstanding shares of 16,548,198 from $.69 on average outstanding shares of 16,356,462 in 1992.
YEARS ENDED DECEMBER 31, 1992 AND 1991
Net income was $11,323,000 in 1992 compared to $14,653,000 for the comparable period in 1991, a decrease of $3,330,000 (-23%). The significant components of this change include increased rental income ($496,000), offset by increased property operating expense (-$1,547,000), interest expense (-$1,155,000), depreciation expense (-$730,000), administrative expenses (-$171,000), and decreased mortgage interest and other income (-$223,000).
Net income per share for the year ended December 31, 1992 decreased to $.69 from $.91 in 1991.
LIQUIDITY AND CAPITAL RESOURCES
The Trust has a $35,000,000 unsecured line of credit on which there was an outstanding balance of $33,244,000 as of December 31, 1993. On January 27, 1994, the Trust sold its Marin General Hospital property, located in Larkspur, California, for $12,412,000. The sales proceeds were used to reduce the outstanding balance on the line of credit.
On February 24, 1994, the Trust issued $50,000,000 of 7 7/8% senior notes due February 15, 2004. Proceeds from the sale of senior notes were used to pay the remaining outstanding balance on the line of credit of $17,644,598. The remaining proceeds will be used to acquire properties as suitable opportunities arise and to expand and improve existing properties. The senior notes contain certain covenants which impose limitations on the incurrence of debt and other restrictions.
Funds from operations (FFO), as defined by the National Association of Real Estate Investment Trusts, were $20,854,000 in 1993. Dividends paid in 1993 totaled $18,531,000, resulting in a payout ratio of 88.9% of FFO.
The Trust believes that its current sources of funds will be sufficient to meet its existing capital commitments and operating requirements. The Trust's unsecured $35 million line of credit expires May 31, 1994 and it intends to renew or replace it.
As noted above, the entire amount of the line of credit is currently available. Additionally, the Trust could borrow additional funds using its 55 properties which do not have mortgage debt. However, senior note borrowing limitations impose a cap on total borrowings of 55% of undepreciated real estate assets.
IMPACT OF THE ECONOMY
Occupancy rates of the Trust's investments remained stable at year-end at 90%. In spite of a sluggish California economy and some related tenant fall-out, the Trust has continued to lease space to sustain its occupancy levels. The Trust is positioned to benefit from a general economic improvement which should result in increased occupancy. As occupancy increases, the Trust's rental income should increase and expenses should decrease, as more tenants assume responsibility for operating expenses presently absorbed by the Trust.
During the last several years, high-volume discount retailers, such as Wal-Mart and Costco, entered certain areas of California and Nevada where Trust community shopping center properties are located. The Trust expects that these discounters may positively or negatively affect certain of the Trust's shopping center tenants. The Trust believes that its tenants could benefit if these discounters attract additional customers to nearby Trust properties and thereby generate increased sales for Trust tenants. Conversely, the Trust's tenants could be negatively affected if discounters draw customers away from the Trust's tenants. The Trust believes that to date this trend has had no measurable impact on the Trust's results of operations.
Given the current level of inflation, the Trust believes the effect of inflation on its results of operations is inconsequential. Future increases in inflation would likely increase Trust rental income by increasing tenant revenues upon which percentage rents are based, increasing rents subject to CPI-based escalation clauses and permitting an increase in base rents on new leases.
DIVIDENDS
On March 15, 1994, the Trust paid its 120th consecutive quarterly dividend since it commenced real estate operations in 1964. Dividends paid to shareholders totaled $18,531,000 in 1993. Since the 1993 distributions exceeded current and accumulated earnings and profits, 28.55% is non-taxable and constitutes a return of capital to shareholders. The Trust declares and pays quarterly dividends based on income and funds from operations and the Trust's anticipated ability to maintain or increase such dividends in future years.
RECENT DEVELOPMENTS
In February 1994, the Trust successfully completed a public offering of $50,000,000 in senior notes with a coupon rate of 7 7/8%. On January 27, 1994 the Trust sold its Marin General Hospital property in Larkspur, California, for $12,412,000 resulting in a gain on sale of $3,629,000. Additionally, the Trust has executed agreements for the sale of its interests in the Mid-Peninsula Plaza Shopping center and the Marshall's property in Redwood City, California. The aggregate book value of these three investments at December 31, 1993 was $16,972,000. Interest rates for the short-term investment of the proceeds from these property sales and the senior debt offering are substantially less than the previous yields on these properties and the cost of the senior notes. The Trust will benefit as new properties are acquired with yields substantially greater than yields on short-term investments.
WESTERN INVESTMENT REAL ESTATE TRUST
Financial Statements
Form 10-K Item 8


Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.
None
PART III
Items 10, 11, 12 and 13 are incorporated by reference from the definitive proxy statement relating to the Annual Meeting of Shareholders to be held on May 12, 1994.
PART IV
Item 14.






Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements - Included in Item 8 Page ---- Report of Independent Certified Public Accountants 21 Balance Sheets - December 31, 1993 and 1992 22 Financial Statements for the Years Ended December 31, 1993, 1992 and 1991: Statements of Income 23 Statements of Shareholders' Equity 24 Statements of Cash Flows 25 Notes to Financial Statements 26 to 33
2. Financial Statement Schedules 34 to 39
3. Exhibits
Consent of Independent Certified Public Accountants 41
Incorporated by reference hereto is the Indenture Agreement which was filed as Exhibit 4.1 to Amendment No. 1 to Registration Statement No. 33-22893 filed on July 28, 1988 and the Declaration of Trust which was filed as Exhibit 3.1 to said registration statement.
Consent of Independent Certified Public Accountants
The Trustees Western Investment Real Estate Trust:
We consent to incorporation by reference in the registration statement (No. 33-27016) on Form S-8 of Western Investment Real Estate Trust of our report dated February 7, 1994, except as to Note 14 which is as of February 24, 1994, relating to the balance sheets of Western Investment Real Estate Trust as of December 31, 1993 and 1992, and the related statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993, and the related financial statement schedules as of December 31, 1993, which report appears in the December 31, 1993 annual report on Form 10-K of Western Investment Real Estate Trust.
San Francisco, California KPMG PEAT MARWICK March 29, 1994
SIGNATURES
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 Vice President and Dated: March 29, 1994 Chief Financial Officer ------------------
Pursuant to the requirements of the Security Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
s/ O.A. Talmage Chairman of the March 29, 1994 _______________________________ Board, President, O. A. Talmage Chief Executive Officer and Trustee
s/Dennis D. Ryan Vice President and March 29, 1994 _______________________________ Chief Financial Dennis D. Ryan Officer
s/ William A. Talmage Trustee March 29, 1994 _______________________________ William A. Talmage
s/ Chester R. MacPhee, Jr. Trustee March 29, 1994 _______________________________ Chester R. MacPhee, Jr.
s/ Reginald B. Oliver Trustee March 29, 1994 _______________________________ Reginald B. Oliver
s/ James L. Stell Trustee March 29, 1994 _______________________________ James L. Stell
s/ John R. Beckett Trustee March 29, 1994 _______________________________ John R. Beckett