UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to __________________
Commission File Number 1-13089
U.S. RESTAURANT PROPERTIES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Maryland 75-2687420
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5310 Harvest Hill Rd., Ste. 270, LB 168, Dallas, Texas 75230
------------------------------------------------------------
(Address principal executive offices, including zip code)
972 / 387-1487
----------------------------------------------------
(Registrant's telephone number, including area code)
- - -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of May 8, 1998, there were 13,021,838 shares of Common Stock $.001 par value
outstanding.
Page 1 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997...................................... 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997 (Unaudited)........... 4
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1998 (Unaudited).............. 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 (Unaudited)........... 6
Notes to Consolidated Financial Statements (Unaudited)............ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................15
Item 2. Changes in Securities.............................................15
Item 3. Defaults upon Senior Securities...................................15
Item 4. Submission of Matters to Vote of Security Holders.................15
Item 5. Other Information.................................................15
Item 6. Exhibits and Reports on Form 8-K..................................15
Page 2 of 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. RESTAURANT PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Property, net
Land $ 125,912 $ 109,515
Building and leasehold improvements 238,350 211,200
Machinery and equipment 5,549 4,813
---------------- ---------------
369,811 325,528
Less: Accumulated depreciation (16,582) (13,438)
---------------- ---------------
353,229 312,090
Cash and cash equivalents 13,018 1,104
Restricted cash 700 --
Rent and other receivables, net
(includes $533 and $523 from related parties) 5,534 4,791
Prepaid expenses and purchase deposits 2,088 1,967
Notes receivable
(includes $10,867 and $5,406 from related parties) 15,203 8,518
Mortgage loan receivable 5,905 5,947
Net investment in direct financing leases 13,181 13,764
Intangibles and other assets, net 12,109 10,968
---------------- ---------------
TOTAL ASSETS $ 420,967 $ 359,149
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities
(includes $0 and $121 due to related parties) $ 4,257 $ 4,193
Deferred gain on sale of property 642 642
Lines of credit 150,200 89,196
Notes payable 40,000 40,000
Capitalized lease obligations 144 170
---------------- ---------------
TOTAL LIABILITIES 195,243 134,201
Minority interest in operating partnership 19,345 19,536
Stockholders' Equity
Preferred stock, $.001 par value per share;
50,000 shares authorized, Series A - 3,680
shares issued and outstanding as of
March 31, 1998 and December 31, 1997
(aggregate liquidation value $92,000) 4 4
Common stock, $.001 par value per share;
100,000 shares authorized, 13,022 and 12,698
hares issued and outstanding as of March 31,
1998 and December 31, 1997, respectively 13 13
Additional paid in capital 229,860 226,140
Excess stock, $.001 par value per share,
15,000 shares authorized, no shares issued -- --
Distributions in excess of net income (23,498) (20,745)
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 206,379 205,412
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 420,967 $ 359,149
================ ===============
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended March 31,
----------------------------------
1998 1997
--------------- --------------
Revenues:
Rental income $ 12,308 $ 5,709
Interest income 596 112
Amortization of unearned
income on direct financing leases 317 444
--------------- --------------
Total revenues 13,221 6,265
Expenses:
Rent 742 589
Depreciation and amortization 3,370 1,566
Taxes, general and administrative 1,020 706
Interest expense 3,261 1,452
--------------- -------------
Total expenses 8,393 4,313
--------------- -------------
Income before minority interests
and extraordinary item 4,828 1,952
Minority interest in operating
partnership (234) --
--------------- -------------
Income before extraordinary item 4,594 1,952
Loss on early extinguishment
of debt (190) --
--------------- -------------
Net income 4,404 1,952
Dividends on Preferred Stock/
General Partner's interest (1,776) (39)
--------------- -------------
Net income allocable to Common
Stockholders $ 2,628 $ 1,913
=============== =============
Weighted average shares outstanding
Basic 12,852 10,370
Diluted 13,017 10,616
Net income per share
Basic $0.20 $0.18
Diluted $0.20 $0.18
See Notes to Consolidated Financial Statements
Page 4 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ---------------------- Additional Paid Distributions in
Shares Par Value Shares Par Value In Capital Excess of Net Income Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 3,680 $ 4 12,698 $ 13 $ 226,140 $ (20,745) $ 205,412
Proceeds from exercised
stock options 300 3,099 3,099
Stock issued for Purchase
of ownership interest
in another entity 24 621 621
Net income 4,404 4,404
Dividends on preferred
stock (2,348) (2,348)
Dividends on common
stock (4,809) (4,809)
-------- ---------- ---------- ---------- ---------------- --------------------- --------------
Balance March 31, 1998 3,680 $ 4 13,022 $ 13 $ 229,860 $ (23,498) $ 206,379
======== ========== ========== ========== ================ ===================== ==============
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months ended
March 31,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 4,404 $ 1,952
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 3,370 1,566
Amortization of deferred financing costs 141 56
Minority interest in operating partnership 234 --
Loss on early extinguishment of debt 190 --
Increase in restricted cash (700) --
Decrease (Increase) in rent and other
receivables, net (743) 434
Increase in prepaid expenses (357) (874)
Reduction in net investment in direct
financing leases 583 555
Increase (Decrease) in accounts payable and
accrued liabilities 64 (796)
----------------- ---------------
2,782 941
----------------- ---------------
Cash provided by operating activities 7,186 2,893
Cash flows used in investing activities:
Purchase of property (43,547) (17,457)
Purchase of machines and equipment (736) (3)
Purchase deposits paid (used) 236 (2,697)
Decrease in mortgage loan receivable 42 --
Increase in notes receivable (6,685) (213)
----------------- ---------------
Cash used in investing activities (50,690) (20,370)
Cash flows from financing activities:
Loan origination costs and other intangibles (1,077) (678)
Payments on capitalized lease obligations (26) (50)
Proceeds from line of credit 139,786 22,934
Payments on line of credit (78,782) (39,640)
Proceeds from notes payable -- 40,000
Proceeds from sale of common stock 3,099 --
Preferred stock dividends paid (2,348) --
Cash distributions to stockholders/partners (4,809) (3,517)
Distributions to minority interest (425) --
----------------- ---------------
Cash flows provided by financing activities 55,418 19,049
----------------- ---------------
Increase in cash and cash equivalents 11,914 1,572
Cash and cash equivalents at beginning of period 1,104 381
----------------- ---------------
Cash and cash equivalents at end of period $ 13,018 $ 1,953
================= ===============
Supplemental disclosure:
Interest paid during the period $ 2,572 $ 1,087
Non-cash investing activities:
Fair value of stock issued for ownership
interest in another entity $ 621 $ --
Fair value of stock issued for property $ -- $ 3,320
</TABLE>
See Notes to Consolidated Financial Statements
Page 6 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
U.S. Restaurant Properties, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT"), as defined under the
Internal Revenue Code of 1986, as amended. As noted in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, the Company became the
successor entity to U.S. Restaurant Properties Master L.P. (collectively with
its subsidiaries, "USRP"). The business and operations of the Company are
conducted primarily through U.S. Restaurant Properties Operating L.P. ("OP"). At
March 31, 1998, the Company owns 91.98% of and controls the OP. As of March 31,
1998, the Company owned 635 restaurant and other properties in 46 states.
The accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, which
was filed with the Securities and Exchange Commission ("SEC"). The results of
operations for the three months ended March 31, 1998, are not necessarily
indicative of the results to be expected for the year ending December 31, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this report on Form 10-Q pursuant to the Rules
and Regulations of the SEC. In the opinion of management, the disclosures
contained in this report are adequate to make the information presented not
misleading.
The accompanying consolidated balance sheet as of March 31, 1998 and the other
consolidated financial information for the three months ended March 31, 1998 and
1997, are unaudited, but management of the Company believes that all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the Company's consolidated financial statements for the periods presented
have been included therein.
The Company had 13,021,838 and 12,698,113 shares of Common Stock outstanding as
of March 31,1998 and December 31, 1997 respectively.
2. NET INCOME PER SHARE OF COMMON STOCK
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per share (SFAS No. 128). Earnings per
share amounts presented for the period March 31, 1997 have been restated to
comply with the provisions of SFAS No. 128.
The following table reflects the calculation of basic and diluted earnings per
share for the period ended March 31, 1998 and 1997.
Page 7 of 16
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
(In thousands, except per share amounts) 1998 1997
----------------- ----------------
<S> <C> <C>
Net income before extraordinary item $ 4,594 $ 1,952
Loss on early extinguishment of debt (190) --
----------------- ----------------
Net income 4,404 1,952
Dividends on preferred stock/General
partner interest (1,776) (39)
----------------- ----------------
Net income allocable to shareholders $ 2,628 $ 1,913
================= ================
Net income per share - Basic
Before extraordinary item less
preferred stock dividends/general
partner interest $ 0.22 $ 0.18
Extraordinary loss on extinguishment
of debt (0.02) --
----------------- ----------------
Net income allocable to common stockholders $ 0.20 $ 0.18
================= ================
Net income per share - Diluted
Before extraordinary item, less
preferred stock dividends/general
partner interest $ 0.22 $ 0.18
Extraordinary loss on extinguishment
of debt (0.02) --
----------------- ----------------
Net income allocable to common stockholders $ 0.20 $ 0.18
================= ================
Weighted average shares outstanding (a)
Basic 12,852 10,370
Dilutive effect of outstanding options 165 246
Dilutive effect of guaranteed stock -- --
----------------- ----------------
Diluted 13,017 10,616
================= ================
</TABLE>
(a) Excludes 3,680,000 shares of convertible preferred stock,
913,563 shares of guaranteed stock and 1,148,418 OP units, which
are anti-dilutive.
Comprehensive income is the same as net income for the three months ended March
31, 1998 and 1997.
3. PROPERTY ACQUISITIONS
During the three months ended March 31, 1998, the Company completed the purchase
of 44 restaurant properties for an aggregate purchase price of $44,160,000.
In the normal course of business, the Company may sign purchase agreements and
deposit earnest money to acquire restaurant properties. Such agreements become
binding obligations upon the completion of a due diligence period ranging
usually from 15 - 30 days.
On March 31, 1998, earnest money purchase deposits amounting to $285,000 were on
deposit for the purchase of 12 Shoney's restaurants, three Burger King
restaurants, two Arby's and six other restaurant and gas station properties.
4. REVOLVING CREDIT FACILITIES
On January 17, 1998 the Company entered into a credit agreement with a syndicate
of banks for an unsecured revolving credit line of $175 million. This credit
agreement replaced the Company's then existing line of credit. As of March 31,
1998, the Company has approximately $36 million available under the new credit
agreement. The Company may request advances under this credit agreement to
finance the acquisition of restaurant properties, to repair and update
restaurant properties and for working capital. The banks will also issue standby
letters of credit for the account of the Company under this credit agreement.
This credit agreement expires on January 15, 2001 and provides that borrowings
thereunder bear interest at the then current LIBOR plus a margin spread of
either 1.05%, 1.20% or 1.35%, dependent on a leverage ratio formula.
Page 8 of 16
<PAGE>
As of March 31, 1998 the margin spread was 1.05%. There is an unused line of
credit fee of 0.25% per annum on the unused portion of the credit agreement.
On January 17, 1998, the Company's previous secured revolving credit facility
was terminated and the related unamortized costs were expensed and the
outstanding balance thereunder of $63,782,000 was repaid with funds from the new
unsecured credit agreement.
On August 15, 1997, a wholly owned subsidiary of the Company entered into a
short term borrowing facility (the "Pacific Mutual Facility") of $30 million
which matures on May 20, 1998 and provides that borrowings thereunder bear
interest at LIBOR plus 2.30% per annum. There is a fee of 1.0% per annum on the
unused commitment. The Pacific Mutual Facility is secured by the pledge of
1,351,618 shares of unissued Common Stock of the Company. During the three month
period ended March 31, 1998, the Company repaid $15,000,000 on this revolving
credit facility. At March 31, 1998 the outstanding balance was $11,200,000. On
April 24, 1998 the $11,200,000 balance was repaid and the borrowing facility was
terminated.
5. NOTES PAYABLE
On February 26, 1997, the Company issued $40,000,000 in privately placed debt
which consists of $12,500,000 Series A Senior Secured Guaranteed Notes with a
8.06% interest rate and due date of January 31, 2000; and $27,500,000 Series B
Senior Secured Guaranteed Notes with a 8.30% interest rate and due date of
January 31, 2002. In January, 1998 the note holders agreed to release the
collateral for these notes.
6. RELATED PARTY TRANSACTIONS
Prior to October 15, 1997, QSV Properties, Inc, the Managing General Partner of
USRP ("QSV") was responsible for managing the business and affairs of USRP. USRP
paid QSV a non-accountable annual allowance (adjusted annually to reflect
increases in the Consumer Price Index and additions to the property portfolio),
plus reimbursement of out-of-pocket costs incurred to other parties for services
rendered to USRP. The allowance for the three months ended March 31, 1997 was
$380,000. The Company's accounts payable balance includes $121,000 for this
allowance as of December 31, 1997. In addition QSV was paid a one-time
acquisition fee equal to one percent of the purchase price for additional
property purchases which amounted to $199,000 for the three months ended March
31, 1997. This contract was terminated in conjunction with the Company's
conversion to a REIT on October 15, 1997.
A note receivable of $277,000 and $261,000 is due from Arkansas Restaurants #10
L.P. ("ARLP") at March 31, 1998 and December 31, 1997, respectively. The note
receivable is due on September 1, 1998, and has an interest rate of 9.0% per
annum. At March 31, 1998 and December 31, 1997, tenant and other receivables
from ARLP were $160,000 and $158,000, respectively. The managing general partner
of ARLP is owned by an officer of the Company, who receives no compensation for
this role.
As of March 31, 1998 and December 31, 1997, notes receivable of $1,070,000 were
due from Southeast Fast Food Partners, L.P. ("SFF"). The notes receivable are
due on July 1, 1998 ($207,000) and July 1, 1999 ($863,000) and have an interest
rate of 9.0% per annum. At March 31, 1998 and December 31, 1997 a note
receivable of $136,000 is due from the owners of SFF. This note is due on July
1, 1999, and has an interest rate of 9.0% per annum. As of March 31, 1998 and
December 31, 1997, tenant and other receivables from SFF were $306,000 and
$362,000, respectively. The Managing General Partner of SFF, is owned by an
officer of the Company, who receives no compensation for this role.
During 1996, the Company agreed to make available to USRP Development Company a
revolving line of credit in the principal amount of $5,000,000, to be used
solely for paying for the acquisition and development of restaurant properties
which will be purchased by the Company upon completion of development. The line
of credit is secured by certain development properties and bears interest at an
annual rate of 9.0%. The line of credit was increased to $15,000,000 with
interest only payments due on November 1, 1998, and on each anniversary thereof
throughout the term of the note with all outstanding principal and accrued but
unpaid interest due on October 31, 2001, when it matures. At March 31, 1998, the
outstanding balance was $9,374,000.
Page 9 of 16
<PAGE>
7. STOCKHOLDERS' EQUITY AND MINORITY INTEREST
COMMON STOCK
As reported in the Company's Annual Report on Form 10-K as of December 31, 1997,
the Company effected the conversion of USRP into a self-administered and
self-managed REIT on October 15, 1997. As a result of the Merger, USRP became a
subsidiary of the Company and, at the effective time of the Merger, all holders
of units of beneficial interest of USRP became stockholders of the Company.
Accordingly, information contained in these consolidated financial statements
related to the equity ownership of USRP following October 15, 1997 is presented
as ownership of shares of Common Stock of the Company. On October 30, 1997, the
Company effected a three-for-two stock split. All of the historical Units and
per unit information has been restated to reflect this stock split and
conversion of the units to Common Stock.
MINORITY INTEREST
As reported in the Company's Annual Report on Form 10-K as of December 31, 1997,
the management contract between QSV and USRP was terminated. The contract
termination and QSV's partnership interests in USRP were converted to 126,582
shares of Common Stock of the Company and 1,148,418 units of the OP. The OP
units represent a minority interest in the OP of the REIT. Each OP unit
participates in any income (loss) of the OP based on the percent ownership in
the OP and the OP units held by QSV receive a cash dividend in an amount
equivalent to a share of Common Stock. Each OP unit held by QSV may be exchanged
for one share of Common Stock of the Company. With each exchange of outstanding
OP units for Common Stock, the Company's percentage ownership interest in the
OP, directly or indirectly, will increase. An additional 825,000 shares of
Common Stock of the Company or its equivalent in OP units may be issued to QSV
if certain earnings targets are met by the Company by the year 2000.
As of March 31, 1998 these earnings targets have not been met.
Minority interest in the OP consists of the following at March 31, 1998 (in
thousands):
Balance December 31, 1997 $ 19,536
Distributions (425)
Income allocated to minority interest 234
---------------
Balance at March 31, 1998 $ 19,345
===============
8. SUBSEQUENT EVENTS
As of the April 29, 1998, two affiliates of the Company , U.S. Restaurant
Lending GP, Inc. (the "General Partner") and U.S. Restaurant Lending LP, Inc.
(the "Limited Partner") entered into joint venture and limited partnership
agreements with MLQ Investors, L.P., an affiliate of Goldman, Sachs & Co., to
form two limited partnerships. The two limited partnerships will engage in
lending activities to owners and operators of quick service franchises and gas
station/convenience store outlets. The Company has indirect ownership interests
(through the General Partner and Limited Partner) of 71.25% and 47.5%,
respectively, in these two partnerships. As of April 30, 1998, the partnerships
had originated one mortgage loan in the amount of $2.3 million.
On May 12, 1998 the Company issued $111 million of 7 year fixed rate senior
unsecured notes payable in a private placement. The notes bear interest at the
rate of 7.15% per annum. The net proceeds of the notes were used to repay a
portion of the revolving credit agreement and for general corporate purposes.
Page 10 of 16
<PAGE>
9. PRO FORMA (UNAUDITED)
The following pro forma information was prepared by adjusting the actual
consolidated results of the Company for the three month periods ended March 31,
1998 and 1997 for the effects of:
a. the purchase of 44 properties on various dates from January 1, 1998 through
March 31, 1998 for an aggregate purchase price of $44,160,000 and related
financing transactions; and
b. the purchase of 277 restaurant properties on various dates during 1997 for
an aggregate purchase price of $182,396,000 including the value of 680,696
shares of Common Stock issued to sellers; the loan of $6,000,000 on a
secured mortgage; and the sale of eight restaurant properties for
$5,822,000; the Preferred Stock dividends required and the reduction of
interest expense as a result of the Preferred Stock offering proceeds used
to reduce the total debt outstanding by $87,622,000; the three-for-two
stock split on October 30, 1997; and other related financing transactions,
including the sale of 1,434,831 shares of Common Stock for $25,000,000.
These pro forma operating results are not necessarily indicative of what the
actual results of operations of the Company would have been assuming all of the
properties were acquired as of January 1, 1997 and do not purport to represent
the results of operations for future periods.
Three Months Ended March 31,
-----------------------------
(In thousands, except per share amounts) 1998 1997
------------ -------------
Total Revenues $ 13,686 $ 13,221
============ =============
Net Income 4,546 4,576
Dividends on Preferred Stock (1,776) (1,776)
------------ -------------
Net income allocable to Common Shareholders $ 2,770 $ 2,800
============ =============
Weighted average shares outstanding
Basic 12,852 12,607
Diluted 13,017 12,852
Net income per share
Basic $0.22 $0.22
Diluted $0.21 $0.22
Page 11 of 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS.
The Company derives its revenue from the leasing of its Properties to operators
(primarily restaurant) on a "triple net" basis. Triple net leases typically
require the tenants to be responsible for property operating costs, including
property taxes, insurance and maintenance. A majority of the Company's leases
provide for a base rent plus a percentage of the restaurant's sales in excess of
a threshold amount. As a result, a portion of the Company's revenues is a
function of the number of restaurants in operation and their level of sales.
Sales at individual restaurants are influenced by local market conditions, by
the efforts of specific restaurant operators, by marketing, by new product
programs, support by the franchisor and by the general state of the economy.
On October 15, 1997 the Company changed its form of business from a master
limited partnership to a REIT. U. S. Restaurant Properties, Inc. became the
successor entity to U.S. Restaurant Properties Master L.P. The results of
operations for the three months ended March 31, 1998 are presented as the
continuation of the operations of the predecessor entity.
The results of operations of the Company, together with its predecessors, for
the periods discussed below have been affected by the growth in the total number
of Properties owned by the Company, as well as by increases in rental income
across the portfolio, over such time periods. The following discussion considers
the specific impact of such factors on the results of operations of the Company
for the following periods.
Comparison of the three months ended March 31, 1998 to the three months ended
March 31, 1997
The Company owned 322 properties prior to January 1, 1997. The Company acquired
277 properties and sold 8 properties from January 1, 1997 to December 31, 1997
and the Company acquired 44 properties from January 1, 1998 to March 31, 1998,
the operations of which are included in the periods presented from their
respective dates of acquisition.
Revenues for the three months ended March 31, 1998 totaled $13,221,000 up 111
percent from the $6,265,000 recorded for the three months ended March 31, 1997.
The increase in revenues is primarily due to increases in the number of
properties owned during the period as compared to the same period in 1997.
Through March 31, 1998, approximately 13% of the Company's rental revenues
resulted from percentage rents (rents determined as a percentage of tenant
sales), down from 21% for the three months ended March 31, 1997. As a result,
the impact of restaurant sales had a diminishing impact on total rental
revenues. Also included in revenues is interest income relating primarily to
secured notes and mortgage receivable from tenants and related parties. Interest
income was $596,000 for the three months ended March 31, 1998 compared with
$112,000 for the three months ended March 31, 1997.
Rent expense for the three months ended March 31, 1998 totaled $742,000 an
increase of 26% when compared to the three months ended March 31, 1997.
Depreciation and amortization expenses in the three months ended March 31, 1998
totaled $3,370,000, an increase of 115% when compared to the three months ended
March 31, 1997. The increase in rent expense and depreciation and amortization
expenses directly relates to the property acquisitions.
Taxes, general and administrative expenses for the three months ended March 31,
1998 totaled $1,020,000 an increase of 44% when compared to the three months
ended March 31, 1997. The increase was a result of the costs of the increased
infrastructure, including additional employees, required by the Company to
manage and maintain the Company's rate of growth.
Interest expense for the three months ended March 31, 1998 totaled $3,261,000,
an increase of 125%, when compared to the three months ended March 31, 1997. The
increase in interest expense directly relates to the additional debt associated
with the acquisitions.
Minority interest in net income of the OP of $234,000 for the three months ended
March 31, 1998 related to OP units held by QSV.
Page 12 of 16
<PAGE>
Loss on debt extinguishment of $190,000 for the three months ended March 31,
1998 related to the termination of the Company's previous line of credit.
LIQUIDITY OF CAPITAL RESOURCES.
The Company's principal source of cash to meet its short term cash requirements
is rental revenues generated by the Company's properties. Cash generated by the
portfolio in excess of operating needs is used to reduce amounts outstanding
under the Company's credit agreements. Currently, the Company's primary source
of funding for acquisitions is its existing revolving line of credit. The
Company anticipates meeting its future long-term capital needs through the
issuance of additional debt or equity, including the issuance of additional OP
units, along with cash generated from internal operations. During the three
months ended March 31, 1998 the Company paid dividends of $0.37 per share, or an
aggregate of $5,234,000 to common stockholders and minority interests. In
addition, the Company paid dividends of $0.6380 per share, or an aggregate
$2,348,000 to preferred stockholders covering the period November 17, 1997 to
March 15, 1998.
On January 17, 1998 the Company entered into a credit agreement with a syndicate
of banks for an unsecured revolving credit line of $175 million. This credit
agreement replaced the Company's then existing line of credit. As of March 31,
1998, the Company has approximately $36 million available under the new credit
agreement. The Company may request advances under this credit agreement to
finance the acquisition of restaurant properties, to repair and update
restaurant properties and for working capital. This credit agreement provides
that borrowings thereunder bear interest at LIBOR plus a margin spread which was
1.05% per annum at March 31, 1998.
On May 12, 1998 the Company issued $111 million of 7 year fixed rate senior
unsecured notes payable in a private placement. The notes bear interest at the
rate of 7.15% per annum. The net proceeds of the notes were used to repay a
portion of the revolving credit agreement and for general corporate purposes.
Management believes that the existing debt facilities, along with the Company's
ability to raise additional equity, including the issuance of OP units in
exchange for properties, will provide the Company with sufficient liquidity to
meet operating and growth requirements.
FUNDS FROM OPERATIONS (FFO)
FFO is computed as net income (loss) available to common stockholders (computed
in accordance with GAAP), excluding the effects of direct financing leases,
minority interest, unusual charges and gains (or losses) from debt restructuring
and sales of property, plus real estate related depreciation and amortization.
The Company believes FFO is helpful to investors as a measure of the performance
of an equity REIT because, along with cash flows from operating, financing and
investing activities, it provides investors with an understanding of the ability
of the Company to incur and service debt and make capital expenditures. The
Company believes that it computes FFO in accordance with the standards
established by the National Association of Real Estate Investment Trusts
("NAREIT"), which may differ from the methodology for calculating FFO utilized
by other equity REITs, and, accordingly, may not be comparable to such other
REITs. Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distributions.
The following table sets forth, for the three months ended March 31, 1998 and
1997, the calculation of FFO:
Page 13 of 16
<PAGE>
(in thousands) Three Months Ended
March 31,
----------------------------
Funds From Operations 1998 1997
------------ -------------
Net income allocable to common stockholders $ 2,628 $ 1,913
Direct financing lease payments 582 555
Capital lease principal payments (26) (50)
Depreciation and amortization 3,353 1,566
Income allocable to minority interest 234 --
Income allocable to general partner -- 39
Distributions to general partner -- (70)
Loss on early extinguishment of debt 190 --
------------ --------------
Funds from operations (FFO) $ 6,961 $ 3,953
============ ==============
Total shares applicable to FFO 14,165 10,616
============ ==============
INFLATION
Some of the Company's leases are subject to adjustments for increases in the
Consumer Price Index, which reduces the risk to the Company of the adverse
effects of inflation. Additionally, to the extent inflation increases sales
volume, percentage rents may tend to offset the effects of inflation on the
Company. Because triple net leases also require the restaurant operator to pay
for some or all operating expenses, property taxes, property repair and
maintenance costs and insurance, some or all of the inflationary impact of these
expenses will be borne by the restaurant operator and not by the Company.
Operators of restaurants, in general, possess the ability to adjust menu prices
quickly. However, competitive pressures may limit a restaurant operator's
ability to raise prices in the face of inflation.
SEASONALITY
Fast food restaurant operations historically have been seasonal in nature,
reflecting higher unit sales during the second and third quarters due to warmer
weather and increase leisure travel. This seasonality can be expected to cause
fluctuations in the Company's quarterly revenue to the extent it receives
percentage rent.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
Page 14 of 16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
1) Exhibit 27 - Financial data schedule
B) REPORTS ON FORM 8-K
1) A report on Form 8-K/A dated November 26, 1997 was
filed with the Securities and Exchange Commission on
January 23, 1998, reporting financial information
regarding the acquisition of restaurant properties.
2) A report on Form 8-K dated January 21, 1998 was filed
with the Securities and Exchange Commission on
February 4, 1998, reporting financial information
regarding the acquisition of restaurant properties.
3) A report on Form 8-K/A dated January 21, 1998 was
filed with the Securities and Exchange Commission on
March 20, 1998, reporting financial information
regarding the acquisition of restaurant properties.
Page 15 of 16
<PAGE>
SIGNATURE
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.
U.S. RESTAURANT PROPERTIES, INC.
Dated: May 14, 1998 By /s/ Robert J. Stetson
---------------------------------------
Robert J. Stetson
President and Chief Executive Officer
By /s/ Michael D. Warren
---------------------------------------
Michael D. Warren
Director of Finance
Page 16 of 16
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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0
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