FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended January 31, 1998 Commission File Number 1-6309
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HRE PROPERTIES, INC.
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(Exact Name of Registrant as Specified in Charter)
MARYLAND 04-2458042
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
321 RAILROAD AVENUE, GREENWICH, CT 06830
- ---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 863-8200
The number of shares of Registrant's common shares outstanding as of the close
of period covered by this report: 5,221,642
---------
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
- -
THE SEC FORM 10-Q, FILED HEREWITH, CONTAINS 11 PAGES, NUMBERED CONSECUTIVELY
FROM 1 TO 11 INCLUSIVE, OF WHICH THIS PAGE IS 1.
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<PAGE>
INDEX
HRE PROPERTIES, INC.
PART I. FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--January 31, 1998 and October 31, 1997.
Consolidated Statements of Income--Three months ended January 31, 1998
and 1997,
Consolidated Statements of Cash Flows--Three months ended January 31,
1998 and 1997.
Consolidated Statements of Stockholders' Equity--Three months ended
January 31, 1998 and 1997.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II. OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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2
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HRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JANUARY 31 October 31
---------- ----------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Real Estate Investments:
Properties owned-- at cost, net of accumulated depreciation $94,364 $94,489
Properties available for sale - at cost, net of accumulated
depreciation and recoveries 21,852 22,327
Investment in unconsolidated joint venture 9,005 8,920
Mortgage notes receivable 3,577 3,605
-------- -------
128,798 129,341
Cash and cash equivalents 25,487 1,922
Interest and rent receivable 3,021 2,649
Deferred charges, net of accumulated amortization 2,872 2,468
Other assets 1,202 1,050
-------- --------
$161,380 $137,430
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $34,418 $43,687
Accounts payable and accrued expenses 1,594 1,603
Preferred Dividends payable 210 --
Deferred directors' fees and officers' compensation 579 550
Other liabilities 1,120 1,175
-------- --------
37,921 47,015
Minority Interest 2,125 2,125
Stockholders' Equity:
8.99% Series B Senior Cumulative Preferred stock, par value $.01 per share;
20,000,000 shares authorized; 350,000 shares issued and outstanding
(liquidation preference of $100 per share) 33,500 --
Excess stock, par value $.01 per share; 10,000,000 shares authorized;
none issued and outstanding -- --
Common stock, par value $.01 per share; 70,000,000 shares authorized;
5,221,642 and 5,167,495 outstanding shares in 1998 and 1997, respectively 51 51
Additional paid in capital 118,854 117,763
Cumulative distributions in excess of net income (29,129) (28,530)
Unamortized restricted stock compensation and notes receivable
from officer/stockholders (1,942) (994)
-------- --------
121,334 88,290
$161,380 $137,430
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended January 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Operating leases $5,525 $8,260
Financing leases 88 119
Interest and other 228 159
Equity income of unconsolidated joint venture 28 18
------ ------
5,869 8,556
------ ------
OPERATING EXPENSES:
Property expenses 1,894 1,833
Interest 928 831
Depreciation and amortization 1,216 984
General and administrative expenses 523 491
Directors' fees and expenses 59 53
------ ------
4,620 4,192
------ ------
NET INCOME 1,249 4,364
Preferred stock dividends 210 --
------ ------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $1,039 $4,364
====== ======
NET INCOME PER COMMON SHARE $.20 $ .86
====== ======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,183 5,076
====== ======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
4
<PAGE>
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended January 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $1,039 $4,364
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,216 984
Amortization of restricted stock 60 --
Recovery of investment in properties owned
subject to financing leases 282 242
Equity in income of unconsolidated joint venture (28) (18)
(Increase) Decrease in interest and rent receivable (372) 23
Increase in accounts payable, dividends payable and accrued expenses 230 495
(Increase) decrease in other assets and other liabilities, net (97) 192
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,330 6,282
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INVESTING ACTIVITIES:
Acquisitions of properties (475) (293)
Improvements to properties and deferred charges (317) (1,213)
Deposits on acquisitions (510) --
Investment in unconsolidated joint venture (57) (84)
Payments received on mortgage notes receivable 28 19
Miscellaneous (110) (237)
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NET CASH (USED IN) INVESTING ACTIVITIES (1,441) (1,808)
------- ------
FINANCING ACTIVITIES:
Common dividends paid (1,638) (1,576)
Proceeds from sales of additional common shares 83 126
Net proceeds from sale of preferred stock 33,500 --
Purchases of common shares -- (15)
Payments on mortgage notes payable (9,269) (145)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 22,676 (1,610)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 23,565 2,864
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,922 1,819
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $25,487 $4,683
======= ======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
<PAGE>
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares and per share data)
<TABLE>
<CAPTION>
Unamortized
Preferred Stock Common Shares Restricted
--------------- --------------------------
Outstanding (Cumulative Stock
Number of Additional Treasury Distributions Compensation
Common Par Paid In Shares at In Excess of and Notes
Issued Amount Shares Value Capital Cost Net Income) Receivable Total
------ ------ ------ ----- ------- ---- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES--OCTOBER 31, 1996 -- $ -- 5,346,081 -- $124,126 $(3,492) $(30,668) $-- $89,966
Net Income -- -- -- -- 4,364 -- 4,364
Cash dividends
paid ($.31 per -- -- -- -- (1,576) -- (1,576)
share)
Sale of
additional common
shares
under dividend 4,008 -- 72 -- -- -- 72
reinvestment plan
Exercise of stock 15,666 -- 54 -- -- -- 54
options
Deemed purchase
of common
in connection
with organization
of (272,727) -- (4,295) -- -- -- (4,295)
unconsolidated
joint venture
Purchase and
retirement of
COMMON SHARES -- -- (1,000) -- -- (15) -- -- (15)
-- -- ------- -- -- --- -- -- --
BALANCES - JANUARY 31, 1997 -- -- 5,092,028 -- $119,957 $(3,507) $(27,880) $ -- $88,570
=== === ========= === ======== ======= ========= ==== =======
BALANCES - OCTOBER 31, 1997 -- $--- 5,167,495 $51 $117,763 -- $(28,530) $(994) $88,290
Net Income --- --- --- -- 1,249 -- 1,249
Cash dividends
paid ($.32 per --- --- --- -- (1,638) -- (1,638)
share)
Preferred stock --- --- --- -- (210) -- (210)
dividends declared
Sale of
additional common
shares
under dividend 3,960 -- 77 -- -- -- 77
reinvestment plan
Exercise of stock 437 --- 6 -- -- -- 6
options
Common shares
issued under
restricted stock 49,750 --- 1,008 -- -- -- 1,008
plan - net
Issuance of 350,000 $33,500 --- --- --- -- -- -- 33,500
preferred stock
Unamortized
restricted stock
compensation --- --- --- -- -- (948) (948)
-- -- --- --- --- -- -- ----- -----
BALANCES-JANUARY 31, 1998 350,000 $33,500 5,221,642 $51 $118,854 $ -- $(29,129) $(1,942) $121,334
======= ======= ========= === ======== ==== ========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
<PAGE>
HRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Business
- --------
HRE Properties, Inc., (the "Corporation")a real estate investment trust, is
engaged in the acquisition, ownership and management of commercial real estate,
primarily neighborhood and community shopping centers in the northeastern part
of the United States. Other assets include office and retail buildings and
industrial properties. The Corporation's major tenants include supermarket
chains and other retailers who sell basic necessities.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements include the
accounts of the Corporation, its wholly-owned subsidiary, and joint ventures in
which the Corporation has the ability to control the affairs of the venture. All
significant intercompany transactions and balances have been eliminated. The
Corporation's investment in an unconsolidated joint venture in which it does not
exercise control is accounted for by the equity method of accounting. The
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the three-month period ended January 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 1998. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Corporation's annual report for the fiscal year ended October 31, 1997.
Preferred Stock
- ---------------
The Corporation is authorized to issue up to 20,000,000 million shares of
preferred stock. In January 1998, the Corporation completed a private placement
of 350,000 shares of 8.99% Series B Senior Cumulative Preferred Stock, par value
$.01 per share, with a liquidation preference of $100 per share ("Series B
Preferred Stock"). Holders of the Series B Preferred Stock are entitled to
receive cumulative preferential cash dividends equal to 8.99% per annum, payable
quarterly in arrears and subject to adjustment under certain circumstances.
The Series B Preferred Stock has no stated maturity, will not be subject to any
sinking fund or mandatory redemption and will not be convertible into other
securities or property of the Corporation. On or after January 8, 2008, the
Series B Preferred Stock may be redeemed by the Corporation at its option, in
whole or in part, at a redemption price of $100 per share, plus all accrued but
unpaid dividends. Upon a Change in Control of the Corporation (as defined), (i)
each holder of Series B Preferred Stock shall have the right, at such holder's
option, to
7
<PAGE>
require the Corporation to repurchase all or any part of such holder's Series B
Preferred Stock for cash at a repurchase price of $100 per share, plus all
accrued and unpaid dividends, and (ii) the Corporation shall have the right, at
the Corporation's option, to redeem all or any part of the Series B Preferred
Stock at (a) prior to January 8, 2008, the Make-Whole Price (as defined) and (b)
on or subsequent to January 8, 2008, the redemption price of $100 per share,
plus all accrued and unpaid dividends.
The Series B Preferred Stock also contains covenants which require the
Corporation to maintain certain financial coverages relating to fixed charge and
capitalization ratios. Shares of the Series B Preferred Stock are non-voting;
however, under certain circumstances (relating to non-payment of dividends or
failure to comply with the financial covenants) the preferred stockholders will
be entitled to elect two directors. The net proceeds of the offering are to be
used to repay outstanding mortgage notes payable of approximately $24,000,000
and to make real estate acquisitions.
On January 10, 1998, the Board of Directors declared a distribution of $.60 per
preferred share of stock to shareholders of record on January 30, 1998. The
dividend was paid on February 2, 1998. At January 31, 1998, this transaction is
considered a non-cash financing transaction.
Restricted Stock Plan
- ---------------------
The Corporation has a Restricted Stock Plan (Plan) providing for the grant of
restricted stock awards to key employees of the Corporation. The Plan allows for
restricted stock awards of up to 250,000 common shares of the Corporation.
During the first quarter of fiscal 1998, the Corporation awarded 51,250
restricted shares to certain key employees as an incentive for future services.
The shares vest over five years. Dividends are paid on shares when declared. The
market value of shares awarded has been recorded as unamortized restricted stock
compensation and is shown as a separate component of stockholders' equity.
Unearned restricted stock compensation is being amortized to expense over the
five year vesting period.
Mortgage Notes Payable
- ----------------------
On January 23, 1998, the Corporation fully repaid an outstanding mortgage note
of $9,100,000 with interest at 9.625% per annum from proceeds of the preferred
stock offering.
On February 2, 1998, the Corporation fully repaid an outstanding mortgage note
payable of $14,369,000 with interest at 7.5% per annum from proceeds of the
preferred stock offering.
Subsequent Event and Commitments
- --------------------------------
On March 11, 1998, the stockholders of the Corporation approved an amendment to
the Articles of Incorporation of the Corporation to change the name of the
Corporation from HRE Properties, Inc. to Urstadt Biddle Properties Inc.
effective March 12, 1998.
8
<PAGE>
The Corporation has entered into two contracts to purchase two real estate
properties at an aggregate cost of approximately $7,800,000 all cash.
9
<PAGE>
PART I - FINANCIAL INFORMATION (continued)
Item 2 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Liquidity and Capital Resources
- -------------------------------
The Corporation's liquidity and capital resources include its cash and cash
equivalents, funds available from bank borrowings and long-term mortgage debt,
capital financings and sales of real estate investments. The Corporation meets
its liquidity requirements primarily by generating cash from the operations of
its properties. Payments of expenses related to real estate operations, capital
improvement programs, debt service, management and professional fees, and
dividend requirements place demands on the Corporation's liquidity.
The Corporation believes that the financial resources currently available to it
are sufficient to meet all of its known obligations and commitments and to make
additional real estate investments when appropriate opportunities arise. At
January 31, 1998, the Corporation had cash and cash equivalents of $25.5 million
compared to $1.9 million at October 31, 1997. The Corporation also has $15
million in unsecured lines of credit with two major commercial banks. The credit
lines are available to finance the acquisition, management or development of
commercial real estate and for working capital purposes. The credit lines expire
at various periods in 1998 and outstanding borrowings, if any, may be repaid
from proceeds of debt refinancings or sales of properties. At January 31, 1998,
there were no outstanding borrowings under existing lines of credit and
long-term debt consisted of mortgage notes payable totaling $34.4 million, of
which $1.3 million in principal payments are due in fiscal 1998.
In January 1998, the Corporation sold a $35 million, 8.99% Series B Senior
Cumulative Preferred Stock issue in a private placement to institutional
investors. Net proceeds of the offering of $33.5 million (after deducting
expenses of the offering) are expected to be used to repay approximately $24
million of mortgage debt (of which $9.1 million of mortgage debt was repaid in
January 1998 and $14.4 million was repaid in early February 1998) and to make
acquisitions.
The Corporation makes real estate investments periodically. During the first
quarter of fiscal 1998 the Corporation acquired a retail property located
adjacent to one of its owned properties for a purchase price of $475,000. At
January 31, 1998 the Corporation has contracted to purchase two properties at a
total purchase cost of $7.8 million. The Corporation expects to utilize
available cash resources to acquire the properties.
Funds from Operations
- ---------------------
Funds from Operations is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of properties, plus depreciation and amortization and
the elimination of significant non-recurring charges and credits and after
adjustments for unconsolidated joint ventures. The Corporation believes the
level of Funds from Operations to be an appropriate supplemental financial
measure of its operating performance. Funds from Operations does not represent
cash flows from operations as defined by generally accepted accounting
principles, is not
10
<PAGE>
indicative that cash flows are adequate to fund all cash needs and is not
considered to be an alternative to net income. The Corporation considers
recoveries of investment in properties which are subject to financing leases to
be analogous to amortization for purposes of calculating Funds from Operations.
In the three-month period ended January 31, 1998, Funds from Operations
increased 5.1% to $2,589,000 from $2,463,000 in the year ago period. The
improvement is principally the result of additional leasing of space at certain
of the Corporation's core properties last year, the effect of which is reflected
this year.
Results of Operations
- ---------------------
Revenues
Operating lease income for properties owned during both the first quarter of
fiscal 1998 and 1997 increased by 6% in the three-month period of fiscal 1998,
compared to the same period last year. The increase in the three-month period is
principally the result of new leasing of space at certain of the Corporation's
core properties last year, the effect of which is reflected this year. 1998
revenues also include $335,000 in rental income from newly acquired properties.
Fiscal 1997's first quarter revenues included additional percentage rentals of
$3,250,000 received in settlement of a dispute with one of the Corporation's
tenants. In accordance with the terms of its lease, the tenant was required to
aggregate the sales of all its stores within a specified radius when computing
percentage rent due the Corporation.
Interest income increased in fiscal 1998 from the reinvestment of proceeds of
the preferred stock issue in January 1998 in short-term investments.
Expenses
Total expenses amounted to $4,620,000 in the first three-months of fiscal 1998
compared to $4,192,000 for the same period last year.
The largest expense category is property expenses of the Corporation's real
estate operating properties. The increase in property expenses in 1998 include
operating expenses totaling $105,000 of Eastchester Mall, a property in which
the Corporation acquired an interest at the end of fiscal 1997. Fiscal 1998
amounts also reflect the absence of operating expenses totaling $47,000 of
Countryside Square, a property which was contributed to an unconsolidated joint
venture during the first quarter of last year.
Interest expense increased by $97,000 in the three month period ended January
31, 1998 from the addition of a new $5,000,000 mortgage loan at 7.79% per annum
obtained in connection with the acquisition of an interest in the Eastchester
Mall.
Depreciation and amortization expense increased in the first quarter of fiscal
1998 principally from depreciation on the Eastchester Mall.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
The Registrant filed with the Commission a Current Report on Form
8K dated January 8, 1998. Such report referred under Item 5 to the
private placement of 350,000 shares of 8.99% Series B Senior
Cumulative Preferred Stock to three "accredited investors" for an
aggregate purchase price of $35,000,000 pursuant to a certain
subscription agreement dated January 8, 1998 as more fully
discussed in the Notes to Financial Statements.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HRE PROPERTIES, INC.
--------------------
(Registrant)
By /s/ Charles J. Urstadt
------------------------------------------------
Charles J. Urstadt
Chairman and
Chief Executive Officer
By:/s/ James R. Moore
-----------------------------------------------
James R. Moore
Executive Vice President/
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Dated: March 13, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 25,487,000
<SECURITIES> 0
<RECEIVABLES> 3,021,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 140,890,000
<DEPRECIATION> (24,674,000)
<TOTAL-ASSETS> 161,380,000
<CURRENT-LIABILITIES> 1,804,000
<BONDS> 34,418,000
0
33,500,000
<COMMON> 118,905,000
<OTHER-SE> (31,071,000)
<TOTAL-LIABILITY-AND-EQUITY> 121,334,000
<SALES> 0
<TOTAL-REVENUES> 5,869,000
<CGS> 0
<TOTAL-COSTS> 1,894,000
<OTHER-EXPENSES> 1,798,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 928,000
<INCOME-PRETAX> 1,039,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,039,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,039,000
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
