<PAGE> 1
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 September 30, 1997 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 1-10328
BRADLEY OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 04-3306041
(State of Organization) (I.R.S. Identification No.)
40 Skokie Blvd., Northbrook, Illinois 60062
(Address of Registrant's Principal Executive Offices)
Registrant's telephone number, including area code; (847) 272-9800
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
--- ---
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except unit data)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Real estate investments-at cost $ 575,599 $ 490,133
Accumulated depreciation and amortization (38,533) (30,670)
--------- ---------
Net real estate investments 537,066 459,463
Real estate investments held for sale 10,005 10,285
Other Assets:
Cash and cash equivalents 4,404 7,462
Rents and other receivables, net
of allowance for doubtful accounts
of $2,437 for 1997 and $1,636 for
1996 12,249 9,543
Deferred charges, net and other assets 14,146 15,531
--------- ---------
Total assets $ 577,870 $ 502,284
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage loans 128,711 125,394
Line of credit 121,800 63,500
Accounts payable, accrued
expenses and other liabilities 20,088 19,606
--------- ---------
Total liabilities 270,599 208,500
--------- ---------
Minority interest 868 874
--------- ---------
Partners' capital:
General partner 291,981 288,764
Limited partners 14,422 4,146
--------- ---------
Total partners' capital 306,403 292,910
--------- ---------
Total liabilities and partners' capital $ 577,870 $ 502,284
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 3
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income:
Rental income $ 24,033 $ 21,442 $ 69,922 $ 54,643
Other income 451 441 1,093 996
------------ ----------- ----------- -----------
24,484 21,883 71,015 55,639
Expenses: ------------ ----------- ----------- -----------
Operations, maintenance and management 3,479 3,485 10,478 9,277
Real estate taxes 4,025 4,375 13,652 12,063
Mortgage and other interest 4,362 4,106 11,593 9,660
Administrative and general 1,310 813 3,287 1,992
Corporate office relocation - 409 - 409
Write-off of deferred financing and acquisition costs - - - 344
Depreciation and amortization 4,244 3,597 12,099 9,573
------------ ----------- ----------- -----------
17,420 16,785 51,109 43,318
------------ ----------- ----------- -----------
Income before gain on sale and provision for loss on
real estate investments 7,064 5,098 19,906 12,321
Gain on sale of property - - 3,073 9,379
Provision for loss on real estate investment - - (1,300) -
------------ ----------- ----------- -----------
Income before allocation to minority interest 7,064 5,098 21,679 21,700
Income allocated to minority interest (24) (25) (70) (54)
------------ ----------- ----------- -----------
Net income $ 7,040 $ 5,073 $ 21,609 $ 21,646
============ =========== =========== ===========
Per unit data:
Net income per unit $ 0.31 $ 0.27 $ 0.97 $ 1.28
============ =========== =========== ===========
Weighted average units outstanding $ 22,591,276 18,980,883 22,372,142 16,859,016
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Dollars in thousands, except per unit data)
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
-------- -------- --------
<S> <C> <C> <C>
Balance at December 31, 1996 $288,764 $ 4,146 $292,910
Net income 9,038 247 9,285
Cash distributions ($.33 per LP Unit) (7,289) (195) (7,484)
Capital contributions 192 - 192
Acquisition of property for LP Units - 5,169 5,169
Other - (13) (13)
Reallocation of partners' capital 1,371 (1,371) -
-------- -------- --------
Balance at March 31, 1997 292,076 7,983 300,059
Net income 5,143 141 5,284
Cash distributions ($.33 per LP Unit) (7,287) (203) (7,490)
Capital contributions 117 - 117
Reallocation of partners' capital (4) 4 -
-------- -------- --------
Balance at June 30, 1997 290,045 7,925 297,970
Net income 6,751 289 7,040
Cash distributions ($.33 per LP Unit) (7,384) (346) (7,730)
Capital contributions 95 - 95
Acquisition of property for LP Units - 9,028 9,028
Reallocation of partners' capital 2,474 (2,474) -
-------- -------- --------
Balance at September 30, 1997 $291,981 $ 14,422 $306,403
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,609 $ 21,646
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,099 9,573
Gain on sale of property (3,073) (9,379)
Provision for loss on real estate investment 1,300 -
Write-off of deferred financing and
acquisition costs - 344
Income allocated to minority interest 70 54
Changes in operating assets and liabilities, net of
the effect of the Tucker acquisition in 1996:
(Increase) decrease in rents and other receivables (2,791) 2,059
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 177 (518)
Increase in deferred charges (1,722) (2,146)
--------- ---------
Net cash provided by operating activities 27,669 21,633
--------- ---------
Cash flows from investing activities:
Expenditures for real estate investments (83,030) (5,612)
Purchase of Tucker, net of cash acquired - (2,073)
Net proceeds from sale of property 17,260 -
Excess proceeds from like-kind exchange of properties - 4,145
--------- ---------
Net cash used in investing activities (65,770) (3,540)
--------- ---------
Cash flows from financing activities:
Borrowing from lines of credit 78,300 118,000
Cost associated with modified line of credit (391) -
Pay-off of secured mortgage loans with borrowings
from lines of credit - (32,234)
Payments under lines of credit (20,000) (84,208)
Expenditures to acquire new line of credit - (1,468)
Distributions paid (22,704) (16,626)
Distributions to minority interest holders (89) (65)
Capital contributions 404 150
Principal payments on mortgage loans (477) (308)
--------- ---------
Net cash provided by (used in) financing activities 35,043 (16,759)
--------- ---------
Net increase (decrease) in cash and cash equivalents (3,058) 1,334
Cash and cash equivalents:
Beginning of period 7,462 697
--------- ---------
End of period $ 4,404 $ 2,031
========= =========
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 11,613 $ 9,748
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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BRADLEY OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim financial statements have been prepared by Bradley
Operating Limited Partnership, together with its subsidiaries (the "Operating
Partnership"), without audit, and in the opinion of management reflect all
normal recurring adjustments necessary for a fair presentation of results for
the unaudited interim periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto for the fiscal
year ended December 31, 1996 included in the Operating Partnership's
registration statement on Form 10, as amended.
NOTE 2 - DERIVATIVE FINANCIAL INSTRUMENTS
The Operating Partnership may enter into derivative financial instrument
transactions in order to mitigate its interest rate risk on a related financial
instrument. The Operating Partnership has designated these derivative
financial instruments as hedges and applies deferral accounting, as the
instrument to be hedged exposes the Operating Partnership to interest rate risk
and the derivative financial instrument reduces that exposure. Gains and
losses related to the derivative financial instrument are deferred and
amortized over the terms of the hedged instrument. If a derivative terminates
or is sold, the gain or loss is deferred and amortized over the remaining life
of the derivative. Derivatives that do not satisfy the criteria above are
carried at market value, and any changes in market value are recognized in
other income. The Operating Partnership has only entered into derivative
transactions that satisfy the aforementioned criteria.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
During the period from January 1, 1997 to June 30, 1997, the Operating
Partnership acquired five shopping centers located in Indiana, Iowa and
Minnesota aggregating approximately 397,000 square feet for a total purchase
price of approximately $26.4 million. Three of the five shopping centers were
acquired for cash provided by the bank line of credit. One shopping center was
acquired with cash provided by the line of credit and the assumption of a $3.8
million non-recourse mortgage note, and one shopping center was acquired via
the issuance of 281,300 limited partnership units ("LP Units") in the Operating
Partnership. Additionally, during such period, the Operating Partnership sold
a shopping center located in New Hampshire, utilizing the net proceeds of
approximately $11.4 million to pay-down the line of credit.
During the third quarter of 1997, the Operating Partnership completed the
acquisitions of nine shopping centers located in Illinois, Indiana, Iowa,
Wisconsin and Missouri, aggregating approximately 1,055,000 square feet for a
total purchase price of approximately $69.3 million. Eight of the nine
shopping centers, including a portfolio of five shopping centers purchased from
one seller, were purchased with cash provided by the line of credit. The
remaining shopping center was acquired through the issuance of 478,619 LP Units
and the assumption of $6.9 million in non-recourse mortgage debt, which was
paid-off in full at close with cash drawn from the line of credit. As a result
of this acquisition, there are currently 1,070,920 LP Units outstanding. Also
during the third quarter of 1997, the Operating Partnership sold a shopping
center located in Illinois, utilizing the net proceeds of approximately $5.9
million to pay-down the line of credit.
Subsequent to quarter-end, the Operating Partnership completed the sale of a
shopping center located in Maine, utilizing the net proceeds of approximately
$2.4 million to pay-down the line of credit. Also subsequent to quarter-end,
the Operating Partnership acquired an additional three shopping centers located
in Kansas and Illinois aggregating approximately 313,000 square feet for a
total purchase price of approximately $22 million, increasing the total number
of shopping centers acquired during the year (including an acquisition
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completed December 27, 1996) to eighteen, aggregating approximately 1.9 million
square feet for a total purchase price of approximately $126.8 million.
As a result of these acquisition and disposition activities, the Operating
Partnership currently owns interests in 46 properties in 11 states, aggregating
approximately 8.8 million square feet of rentable space.
NOTE 4 - SUPPLEMENTAL CASH FLOW DISCLOSURE
During the first nine months of 1997, two properties were purchased in the
aggregate for approximately $21.8 million which included the issuance of
759,919 LP Units.
In January 1997, a property was purchased for approximately $4.8 million, which
included the assumption of a $3.8 million non-recourse mortgage note.
NOTE 5 - REAL ESTATE INVESTMENTS HELD FOR SALE
As of September 30, 1997, the Operating Partnership is holding for sale its
Augusta Plaza, 585 Boylston Street and Village Shopping Center properties. The
net book value of these properties, $10.0 million, has been reclassified on the
balance sheet from "Real estate investments" to "Real estate investments held
for sale". The balance as of December 31, 1996, $10.3 million, included Hood
Commons, which was sold in March 1997, and excluded Village Shopping Center,
which was placed for sale during March 1997. The properties held for sale are
no longer depreciated for financial reporting purposes. The sale of Augusta
Plaza was completed on October 1, 1997 for a sales price of approximately $2.7
million resulting in a gain of approximately $0.8 million for financial
reporting purposes, which will be reflected in the fourth quarter.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In August 1997, Standard & Poor's Investment Services ("Standard & Poor's"), a
national credit rating agency, announced that it assigned an investment grade
corporate credit rating of "BBB-" to the Operating Partnership. In November
1997, Moody's Investors Service ("Moody's") announced that it also assigned an
investment grade corporate credit rating of "(P)Baa3" to the Operating
Partnership's unissued shelf registration of debt securities. As a result, the
interest rate on outstanding borrowings under the unsecured line of credit
facility was reduced from the lower of the bank's base rate or 1.50% over
LIBOR, to the lower of the bank's base rate or 1.375% over LIBOR. The rate
becomes more favorable in the event the Operating Partnership receives a higher
rating from Standard & Poor's or Moody's. The rate returns to the lower of the
bank's base rate or 1.50% over LIBOR in the event Standard & Poor's or Moody's
adjusts their rating downward.
As a result of receiving the investment grade ratings and based on current
market conditions, management believes that it may be advantageous to prepay
the $100 million REMIC Note using either the proceeds from the issuance of
investment grade unsecured debt or the standby letter of credit described
below, thereby releasing the six properties securing the REMIC Note from the
lien of the REMIC Indenture, and extending the Operating Partnership's weighted
average debt maturity. In contemplation of this potential financing, and
future unsecured financings from time to time, during the third quarter the
Operating Partnership filed a "shelf" registration statement under which, when
effective, the Operating Partnership may issue up to $300,000,000 in unsecured
non-convertible investment grade debt securities. After it is declared
effective, the "shelf" registration statement will give the Operating
Partnership the flexibility to issue such debt securities from time to time
when the Operating Partnership determines that market conditions and the
opportunity to utilize the proceeds from the issuance of such securities is
favorable. There can be no assurance that the Operating Partnership will in
fact issue investment grade debt securities.
On October 24, 1997, the Operating Partnership gave the REMIC Trustee
notice of its intent to prepay the REMIC Note on November 26, 1997.
Concurrently with the delivery of such notice, the Operating Partnership
entered into a standby commitment with a commercial bank for a $105 million
line of credit, which the Operating Partnership may use to prepay the REMIC
Note on November 26, 1997, in the event that a sale of investment grade debt
securities has not been consummated by such date. There can be no assurance
that the Operating Partnership will prepay the REMIC Note or that, if the REMIC
Note is prepaid, the
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<PAGE> 8
effective cost of doing so will not be greater than the current interest cost
of the REMIC Note.
As a result of the prepayment of the REMIC Note, the Operating Partnership will
incur a significant prepayment penalty equal to the greater of either (i) 1% of
the amount of principal being prepaid or (ii) the product of (A) the difference
between the outstanding principal balance of the REMIC Note before prepayment
and the present value of all remaining interest and principal payments thereon
and (B) the amount of principal being prepaid divided by the outstanding
principal balance of the REMIC Note. The amount of such prepayment is
currently estimated at approximately $3,900,000. Management believes that,
even with the prepayment penalty, refinancing the REMIC Note with debt at
interest rates currently available will economically benefit the Operating
Partnership more than keeping the REMIC Note outstanding until its stated
maturity in September 2000 at which time interest rates may be substantially
higher.
In anticipation of issuances of investment grade unsecured debt, and because
management considered interest rates to be at historically favorable levels,
during the third quarter the Operating Partnership entered into four Treasury
Rate Lock transactions to hedge against the potential of interest rates
increasing for maturities of seven and ten years (the anticipated maturities of
the anticipated debt offerings) prior to the execution of the financings.
Subsequent to September 30, 1997, the Operating Partnership entered into an
additional Treasury Rate Lock transaction to further reduce the exposure of
increases in interest rates prior to such investment grade unsecured debt
issuance. In the event a debt issuance has not been consummated by the
expiration date of the Treasury Rate Lock agreements, the Operating Partnership
expects to roll over such agreements under the same terms expiring on a date
that would coincide with the anticipated issuance date. The Operating
Partnership may continue to limit its exposure to increases in interest rates
in anticipation of future financing transactions through the use of additional
Treasury Rate Locks or other financial derivative instruments. There can be no
assurance, however, that the existing Treasury Rate Locks or future derivative
transactions entered into for the purpose of hedging interest rate risk will be
effective.
On October 22, 1997, Bradley Real Estate, Inc. (the "Company"), the sole
general partner and owner of approximately 95.3% of the Operating Partnership
evidenced by general partnership units ("GP Units"), entered into an agreement
with PaineWebber Incorporated whereby PaineWebber, acting as underwriter, will
purchase up to $60 million of the Company's common stock over the next six
months at the then current market price less a negotiated discount. Under the
terms of the agreement, the Company, at its option, has the right to sell
common shares in amounts ranging from $5 million to $20 million per
transaction. The sale price (before discount) would be fixed at the New York
Stock Exchange closing price of the Company's common stock on the next or
second next trading day after delivery to PaineWebber of a securities purchase
notice specifying the number of shares to be sold in the particular
transaction. It is expected that the Company will contribute, in exchange for
an equivalent number of GP Units, the net proceeds from equity raised under the
agreement to facilitate the Operating Partnership's acquisition program, reduce
amounts outstanding under the line of credit and for general business purposes.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
During the first nine months of 1997, the Operating Partnership acquired
fourteen shopping centers for a total purchase price of approximately $95.7
million, and sold two shopping centers for a total net sales price of
approximately $17.3 million. During the year ended December 31, 1996, the
Operating Partnership acquired sixteen properties, including fourteen
properties in connection with the acquisition of Tucker Properties Corporation
("Tucker"), and sold its interest in a ground lease. For the nine months ended
September 30, 1997, net income was $21.6 million, or $0.97 per unit, compared
with $21.6 million, or $1.28 per unit, for the nine months ended September 30,
1996. Net income for the nine months ended September 30, 1997, includes a $3.1
million gain on sale of property reflected in the first quarter and a $1.3
million provision for loss on real estate investment reflected in the second
quarter. Net income for the nine months ended September 30, 1996, includes a
$9.4 million gain on sale of property reflected in the first quarter. Weighted
average units outstanding for the nine month period were 22,372,142 compared
with 16,859,016 in the prior-year period. Net income for the three months
ended September 30, 1997, totaled $7.0 million, or $0.31 per unit, compared
with $5.1 million, or $0.27 per unit, for the comparable period in 1996.
Weighted average units outstanding for the quarter increased to 22,591,276 from
18,980,883 for the same period in the prior year. The increased number of
units outstanding was due primarily to a 2,875,000 share public offering
completed in November 1996, which net proceeds were contributed to the
Operating Partnership in exchange for an equivalent number of GP Units, and the
issuance of 7,428,157 GP Units to the Company in connection with the Tucker
acquisition on March 15, 1996.
Acquisition and Disposition Activities:
<TABLE>
<CAPTION>
Acquisitions Date
------------ ----
<S> <C>
Tucker (14 properties) March 15, 1996
Brookdale Square, Brooklyn, MN March 26, 1996
Santa Fe Square, Olathe, KS December 27, 1996
Roseville Center, Roseville, MN January 1, 1997
Martin's Bittersweet Plaza, Mishawaka, IN January 1, 1997
Warren Plaza, Dubuque, IA January 21, 1997
Spring Village, Davenport, IA April 28, 1997
Davenport Retail, Davenport, IA June 19, 1997
Fairhills Shopping Center, Springfield, IL July 1, 1997
Parkway Pointe, Springfield, IL July 1, 1997
Sangamon Center North, Springfield, IL July 1, 1997
Burlington Plaza, Burlington, IA July 1, 1997
Holiday Plaza, Cedar Falls, IA July 1, 1997
County Line Mall, Indianapolis, IN July 31, 1997
Parkwood Plaza, Urbandale, IA August 1, 1997
Madison Plaza, Madison, WI August 25, 1997
Liberty Corners, Liberty, MO August 29, 1997
Dispositions Date
------------ ----
Nicollet Avenue, Minneapolis, MN March 26, 1996
Hood Commons, Derry, NH March 13, 1997
Meadows Town Mall, Rolling Meadows, IL August 8, 1997
</TABLE>
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Property Specific Revenues And Expenses (in thousands of dollars):
<TABLE>
<CAPTION>
Nine months ended Properties
September 30, Acquisitions/ Held Both
1997 1996 Difference Dispositions Periods
------------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Rental income $69,922 $54,643 $15,279 $14,517 $ 762
Operations, maintenance
and management 10,478 9,277 1,201 1,952 (751)
Real estate taxes 13,652 12,063 1,589 2,084 (495)
Depreciation and
amortization 12,099 9,573 2,526 2,430 96
</TABLE>
<TABLE>
<CAPTION>
Three months ended Properties
September 30, Acquisitions/ Held Both
1997 1996 Difference Dispositions Periods
------------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Rental income $24,033 $21,442 $2,591 $2,294 $ 297
Operations, maintenance
and management 3,479 3,485 (6) 384 (390)
Real estate taxes 4,025 4,375 (350) 362 (712)
Depreciation and
amortization 4,244 3,597 647 391 256
</TABLE>
Results attributable to acquisition and disposition activities:
Rental income increased from $54,643,000 in the first nine months of 1996 to
$69,922,000 in the first nine months of 1997. Approximately $14,517,000 of the
increase was attributable to the Operating Partnership's acquisition and
disposition activities. Rental income increased from $21,442,000 for the three
month period ended September 30, 1996, to $24,033,000 for the same period in
1997. Approximately $2,294,000 of the increase was attributable to the
Operating Partnership's acquisition and disposition activities.
Operations, maintenance and management expense increased from $9,277,000 in the
first nine months of 1996 to $10,478,000 in the first nine months of 1997.
Operations, maintenance and management expenses incurred for properties
acquired during the nine month period, net of such expenses eliminated for
properties disposed, of $1,952,000 were partially offset by a decrease of
$751,000 in such expenses for properties held both periods. For the three
month period ended September 30, 1997, operations, maintenance and management
expense decreased to $3,479,000 from $3,485,000 for the same period in 1996,
despite incurring a net increase of approximately $384,000 due to acquisition
and disposition activities.
Real estate taxes increased from $12,063,000 in the first nine months of 1996
to $13,652,000 in the first nine months of 1997, despite an increase of
$2,084,000 for the nine month period attributable to expenses incurred for new
acquisitions net of the elimination of such expenses for properties disposed,
since real estate taxes for properties held both periods decreased $495,000.
Real estate taxes decreased from $4,375,000 for the three month period ended
September 30, 1996, to $4,025,000 for the same period in 1997, despite an
increase in real estate taxes of $362,000 due to the Operating Partnership's
acquisition and disposition activities. The decrease in real estate taxes for
properties held both periods of $712,000 represents a 16.3% reduction from the
prior year period.
Depreciation and amortization increased from $9,573,000 in the first nine
months of 1996 to $12,099,000 in the first nine months of 1997. Approximately
$2,430,000 of the increase was attributable to the Operating Partnership's
acquisition and disposition activities. For the three month period,
depreciation and amortization increased from $3,597,000 to $4,244,000, or
$647,000. Approximately $391,000 of the increase was attributable to the
Operating Partnership's acquisition and disposition activities, and $256,000
was attributable to increases from properties held both periods.
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Results for properties fully operating throughout both periods:
The remaining increase in rental income for the nine month period ended
September 30, 1997, of $762,000 represented a nominal increase of 1.4% over the
first nine months of 1996, but was attained despite a reduction in property
operating expenses, from which recoveries from tenants are derived, of
approximately 5.8%. The positive variance was primarily due to increases in
rental income at Har Mar Mall of approximately $466,000, or 10.5%, and
Rivercrest Shopping Center of approximately $378,000 or 9.7%, resulting
primarily from successful leasing activity, partially offset by a decrease at
Westview Shopping Center of approximately $397,000, or 12.8%, where tax
reimbursements were lower due to a reduction in the related real estate tax
expense. Additionally, subsequent to quarter-end, Waccamaw Pottery had a
successful grand opening of their 55,000 square foot space at Westview Shopping
Center, which is expected to contribute to increased rental income in future
quarters. The increase in rental income for properties held throughout the
three months ended September 30, 1997 and 1996 of $297,000, was again a nominal
1.4%, but was attained despite a reduction in property operating expenses of
approximately 14.0%. The most significant increases in rental income were
achieved at Har Mar Mall due to increased leasing activity and higher
percentage rents resulting from positive sales at the Center, at Burning Tree
Plaza due to the expansion of Best Buy, at Crossroads Shopping Center due to
the expansion of T.J. Maxx, and at Commons of Chicago Ridge due to the
commencement of a 55,000 square foot JC Penney Homestore. These increases were
partially offset by a reduction in rental income at Westview Shopping Center
due to lower tax reimbursements due to the reduction in the related real estate
tax expense. During the second quarter, the Company signed a new lease with
OfficeMax for 30,000 square feet at Grandview Plaza, which is expected to
commence in the fourth quarter of 1997, slightly ahead of schedule, and
contribute to higher rental income. In October 1997, the Operating Partnership
received notice from Montgomery Ward, which filed for Chapter 11 bankruptcy
protection in July 1997, that it intends to close the store at Heritage Square
on or before December 31, 1997. The tenant has paid, and is expected to
continue to pay, post-petition rent and other charges through the closing date.
However, rental income is expected to decrease for such space upon closing of
the store. The Operating Partnership has begun efforts, and is in discussions
with prospective tenants, to re-lease the 111,000 square foot space.
The remaining decrease in operations, maintenance and management expense of
$751,000, or 8.1%, from the first nine months of 1996, was primarily
attributable to cost savings resulting from the completion in the second
quarter of 1996 of the internalization of the property management function for
the properties located in the Midwest. The decrease in the three month period
of $390,000, or 11.2%, was primarily due to expense savings at One North State
due to lower negotiated rates on contract services, and expense savings at
Village Shopping Center and Commons of Chicago Ridge, both due to parking lot
repairs in the prior year period, along with decreases at various other
locations.
The remaining decrease in real estate taxes of $495,000, or 4.1%, for the nine
month period ended September 30, 1997, and $712,000, or 16.3%, for the three
month period then ended, results from management's successful negotiation of
tax reductions most significantly at Westview Shopping Center, Commons of
Chicago Ridge and Rivercrest Shopping Center.
The remaining increases in depreciation and amortization of $96,000 and
$256,000 for the nine and three month periods, respectively, ended September
30, 1997, compared with the same periods in 1996, were primarily a result of
new construction and leasing at White Bear Hills, Har Mar Mall and Burning Tree
Plaza as well as new tenancies at various other locations.
Non-Property Specific Expenses:
Mortgage and other interest expense increased to $11,593,000 for the nine
months ended September 30, 1997, from $9,660,000 during the same period in
1996, and increased to $4,362,000 from $4,106,000 during the three month period
ended September 30, 1997, compared with the same period in 1996. Debt assumed
in the Tucker acquisition on March 15, 1996, consisting primarily of the $100
million REMIC mortgage note secured by six of the acquired Tucker properties,
accounted for $1,711,000 of the increase during the nine month period,
11
<PAGE> 12
but did not contribute to an increase during the three month period because
such debt was outstanding during the full quarter each year. Additionally,
mortgage interest expense on the mortgage note assumed upon the acquisition of
Martin's Bittersweet Plaza in January 1997 contributed to an increase of
approximately $253,000 during the first nine months of 1997 compared with the
first nine months of 1996, and $83,000 for the three month period ended
September 30, 1997, compared with the three month period in 1996. Despite a
weighted average interest rate of 7.47% for the three month period in 1997
compared with a weighted average interest rate of 7.71% for the same period in
1996, a higher average outstanding balance on the line of credit, which was
used to fund substantially all of the acquisition activity during 1997, and
which was paid-down in the fourth quarter of 1996 with the proceeds contributed
from the Company's public offering of common stock, resulted in an increase in
interest expense of $170,000 during the three month period. For the nine month
period, the change in interest expense on the line of credit was minimal.
Administrative and general expense increased from $1,992,000 during the nine
months ended September 30, 1996, to $3,287,000 during the nine months ended
September 30, 1997, and from $813,000 for the three months ended September 30,
1996, to $1,310,000 for the three months ended September 30, 1997. Although
the acquisition of Tucker created substantial operating efficiencies, following
the Tucker acquisition the Operating Partnership reorganized its internal
operations to function by disciplines rather than geography. The
reorganization included the addition of executive management for leasing, asset
management and acquisition activities. In addition, the acquisition of
eighteen properties since September 30, 1996 has required an increase in
personnel to manage the additional workload. As a result of the aforementioned
reorganization and acquisition activity, the number of employees has increased,
resulting in an increase in payroll costs. Additionally, during the third
quarter of 1997, approximately $162,000 of costs relating to potential
acquisitions were written-off, since such acquisitions were deemed improbable.
During the first quarter of 1996, the Operating Partnership incurred a one-time
charge of $344,000 consisting of deferred financing costs related to the
Operating Partnership's former bank line of credit and certain deferred
acquisition costs related to acquisitions which the Operating Partnership chose
not to pursue due to the efforts required to finalize the Tucker transaction.
During the third quarter of 1996, the Operating Partnership relocated its
headquarters from Boston, Massachusetts to Northbrook, Illinois, resulting in a
charge to earnings of approximately $409,000.
LIQUIDITY AND CAPITAL RESOURCES
General
The Operating Partnership funds operating expenses and distributions primarily
from operating cash flows, although its bank line of credit may also be used
for these purposes. The Operating Partnership and the Company may each borrow
under the bank line of credit and are jointly and severally liable for all
obligations thereunder. The Operating Partnership funds acquisitions and
capital expenditures primarily from the line of credit and, to a lesser extent,
operating cash flows, as well as through the issuance of LP Units. The
Operating Partnership may also acquire properties through capital contributions
by the Company of proceeds from the issuance by the Company of additional
securities. Additionally, the Operating Partnership may dispose of certain
non-core properties, reinvesting the proceeds from such dispositions in
properties with higher growth potential and that are more consistent with the
Operating Partnership's strategic focus. In addition, the Operating
Partnership may acquire partial interests in real estate assets through
participation in joint venture transactions.
The Operating Partnership focuses its investment activities on community and
neighborhood shopping centers primarily in the Midwestern United States
anchored by regional and national grocery store chains. The Operating
Partnership will continue to seek acquisition opportunities of individual
properties and property portfolios including public and private real estate
entities in both primary and secondary Midwest markets where management can
utilize its extensive experience in shopping center renovation, expansion,
re-leasing and re-merchandising to achieve long-term cash flow growth and
favorable investment returns.
12
<PAGE> 13
As of September 30, 1997, financial liquidity was provided by approximately
$4,404,000 in cash and cash equivalents and by the Operating Partnership's
unused balance on the line of credit of $28,200,000. In addition, the Company
has an effective "universal shelf" registration statement under which the
Company may issue up to $234,460,000 in equity securities, making such capital
available to the Operating Partnership. During the third quarter, the
Operating Partnership filed a "shelf" registration statement under which it
may, when declared effective, issue up to $300,000,000 in unsecured,
non-convertible investment grade debt securities. The "shelf" registration
statements give the Company and the Operating Partnership flexibility to issue
additional securities from time to time when management determines that market
conditions and the opportunity to utilize the proceeds from the issuance of
such securities are favorable.
The mortgage debt outstanding at September 30, 1997, consisted of fixed-rate
notes totaling $128,711,000 with a weighted average interest rate of 7.58%
maturing at various dates through 2008. Short-term liquidity requirements
include debt service payments due within one year. Scheduled principal
amortization of mortgage debt totaled $477,000 during the nine months ended
September 30, 1997, with another $162,000 scheduled principal payments due for
the remainder of the year. During the year ending December 31, 1998, scheduled
principal payments of approximately $536,000 are due. Additionally, in
September 1998, approximately $10,011,000, with an interest rate of 9.875%, is
scheduled to mature. Management currently expects to fund such debt service
requirements with operating cash flow and the line of credit.
Operating Activities
Net cash flows provided by operating activities increased to $27,669,000 during
the first nine months of 1997, from $21,633,000 during the same period in 1996.
The increase is primarily due to the growth of the Operating Partnership's
portfolio, from 17 properties at January 1, 1996, to 44 properties at September
30, 1997.
Funds from operations ("FFO") increased $10,102,000, or 48%, from $21,263,000
to $31,365,000 for the nine months ended September 30, 1997, compared with the
same period in 1996, and $2,667,000, or 32%, from $8,432,000 to $11,099,000 for
the three months ended September 30, 1997, compared with the same period in
1996. The Operating Partnership generally considers FFO to be a relevant and
meaningful supplemental measure of the performance of an equity REIT because it
is predicated on a cash flow analysis, contrasted with net income, a measure
predicated on generally accepted accounting principles which gives effect to
non-cash items such as depreciation. FFO, as defined by the National
Association of Real Estate Investment Trusts ("NAREIT") and as followed by the
Operating Partnership, represents net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
sales of property, plus depreciation and amortization. In computing FFO, the
Operating Partnership does not add back to net income the amortization of costs
incurred in connection with the Operating Partnership's financing activities or
depreciation of non-real estate assets. FFO does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles and should not be considered as an alternative to cash flow as a
measure of liquidity. Since the definition of FFO is a guideline, computation
of FFO may vary from one REIT (and/or its operating partnership) to another.
FFO is not necessarily indicative of cash available to fund cash needs.
Investing Activities
Net cash flows from investing activities decreased to a net use of cash of
$65,770,000 during the first nine months of 1997, from a net use of cash of
$3,540,000 during the same period of 1996.
During the first nine months of 1997, the Operating Partnership acquired
fourteen shopping centers for a total purchase price of approximately $95.7
million, and sold two shopping centers for a net sales price of approximately
$17.3 million. Subsequent to quarter-end, the Operating Partnership completed
the acquisitions of three additional shopping centers located in Kansas and
Illinois for approximately $22 million, and sold a shopping center
13
<PAGE> 14
located in Maine for a net sales price of approximately $2.4 million.
Financing Activities
Net cash flows provided by financing activities increased to $35,043,000 during
the first nine months of 1997 from a net use of cash of $16,759,000 during the
same period in 1996. Distributions (treated as a reduction in cash flows from
financing activities in the Operating Partnership's financial statements) were
$22,704,000 in the first nine months of 1997, and $16,626,000 in the first nine
months of 1996.
Of the fourteen acquisitions completed during the first nine months of 1997,
eleven of the shopping centers were acquired for cash provided by the Operating
Partnership's unsecured bank line of credit. One shopping center was acquired
with cash provided by the Operating Partnership's unsecured bank line of credit
and the assumption of a $3,800,000 non-recourse mortgage note, and two shopping
centers were acquired via the issuance of 759,919 LP Units to the former owners
of the Centers. Financing for the three shopping centers acquired subsequent
to the quarter-end included approximately $22 million drawn from the Operating
Partnership's unsecured bank line of credit.
During the nine months ended September 30, 1997, the Operating Partnership
completed the sales of Hood Commons and Meadows Town Mall located in New
Hampshire and Illinois, respectively, for a net sales price of $17.3 million.
The net proceeds were used to pay-down the Operating Partnership's unsecured
bank line of credit. Subsequent to September 30, 1997, the net proceeds of
approximately $2.4 million from the sale of Augusta Plaza, located in Maine,
were also used to pay-down the unsecured bank line of credit.
In March 1997, the Operating Partnership amended its $150 million unsecured
revolving credit facility, extending the maturity date to March 15, 1999, and
reducing the interest rate to the lower of the bank's base rate or 1.50% over
LIBOR from the lower of the bank's base rate or 1.75% over LIBOR. The amended
line of credit agreement also provides more flexible covenants compared with
the previous agreement. In August 1997, Standard & Poor's Investment Services
("Standard & Poor's"), a national credit rating agency, announced that it
assigned an investment grade corporate credit rating of "BBB-" to the Operating
Partnership. In November 1997, Moody's Investors Service ("Moody's") announced
that it also assigned an investment grade corporate credit rating of "(P)Baa3"
to the Operating Partnership's unissued shelf registration of debt securities.
As a result, the interest rate on the line of credit was further reduced to the
lower of the bank's base rate or 1.375% over LIBOR, in accordance with the line
of credit agreement, representing a decrease in the interest margin on the line
of credit by 0.375% from December 31, 1996.
Capital Strategy
At September 30, 1997, the Operating Partnership was holding for sale 585
Boylston Street, located in Boston, Massachusetts and Village Shopping Center,
located in Gary, Indiana, as well as Augusta Plaza, located in Augusta, Maine,
which was sold the next day, October 1, 1997. The 585 Boylston Street property
is not aligned with the Operating Partnership's current market strategy.
Village Shopping Center, one of the properties acquired from Tucker, is
considered by management to be a property where the proceeds from a sale could
be better invested in a property or properties with higher growth potential,
requiring lower property management intensity and with a tenant base more
consistent with the current strategy. Proceeds received from a sale of these
properties would provide additional liquidity to the Operating Partnership and
may be applied in whole or in part to tax-deferred "like-kind" exchange
acquisitions of additional properties.
As part of the Tucker acquisition, the Operating Partnership assumed a
$100,000,000 mortgage note secured by six properties. The note had been issued
to an entity qualifying as a real estate mortgage investment conduit (REMIC)
for federal income tax purposes. The REMIC Note has a fixed, 7.3% rate of
interest, with an effective rate of 7.23%, matures in September 2000 and
becomes prepayable, upon payment of a significant prepayment premium, in
October 1997. As of September 30, 1997, approximately 38% of the Operating
Partnership's assets were encumbered by mortgage indebtedness, of which
approximately 30% were encumbered specifically by the REMIC Note. As discussed
above, the investment grade ratings received
14
<PAGE> 15
from Standard & Poor's and Moody's provide the Operating Partnership with the
ability to issue fixed-rate unsecured debt. Based on current market
conditions, management believes that it may be advantageous to prepay the REMIC
Note with either the proceeds from an issuance of investment grade unsecured
debt or the standby line of credit, thereby releasing the six properties
securing the REMIC Note from the lien of the REMIC Indenture, and extending the
Operating Partnership's weighted average debt maturity. Management believes
that, even with the prepayment penalty, refinancing the REMIC Note with debt at
the lower interest rates currently available will economically benefit the
Operating Partnership more than keeping the REMIC Note outstanding until its
stated maturity, at which time interest rates may be substantially higher.
There can be no assurance that the Operating Partnership will in fact issue
investment grade debt securities.
In anticipation of issuances of investment grade unsecured debt, and because
management considered interest rates to be at historically favorable levels,
the Operating Partnership entered into five forward Treasury Note purchase
agreements with third parties in order to partially hedge the interest rate.
On October 24, 1997, the Operating Partnership gave the REMIC Trustee notice of
its intent to repay the REMIC Note on November 26, 1997. Concurrently with the
delivery of such notice, the Operating Partnership entered into a standby
commitment with a commercial bank for a $105 million line of credit, which the
Operating Partnership may use to prepay the REMIC Note on November 26, 1997, in
the event that a sale of investment grade debt securities has not been
consummated by such date. In the event a debt issuance has not been
consummated by the expiration date of the forward Treasury Note purchase
agreements, the Operating Partnership expects to roll over such agreements
under the same terms expiring on a date that would coincide with the
anticipated issuance date. Following repayment of the REMIC, the Operating
Partnership would have approximately $28.5 million of secured debt with
approximately 93% of its property net operating income unencumbered. There can
be no assurance that the Operating Partnership will prepay the REMIC Note or
that, if the REMIC Note is prepaid, the effective cost of doing so will not be
greater than the current interest cost of the REMIC Note.
On October 22, 1997, the Company entered into an agreement with PaineWebber
Incorporated whereby PaineWebber, acting as underwriter, will purchase up to
$60 million of the Company's common stock over the next six months at the then
current market price less a negotiated discount. Under the terms of the
agreement, the Company, at its option, would have the right to sell common
shares in amounts ranging from $5 million to $20 million per transaction. The
sale price (before discount) would be fixed at the New York Stock Exchange
closing price of the Company's common stock on the next or second next trading
day after delivery to PaineWebber of a securities purchase notice specifying
the number of shares to be sold in the particular transaction. It is expected
that the Company will contribute, in exchange for an equivalent number of GP
Units, the net proceeds from equity raised under the agreement to be used to
facilitate the Operating Partnership's acquisition program, reduce amounts
outstanding under the line of credit and for general business purposes.
Management believes that the Company's recent growth and capital structure
activities have positioned it and the Operating Partnership for enhanced growth
through accessing the capital markets using both debt and equity securities.
Management believes accessing the public markets enables the Company and the
Operating Partnership to take advantage of favorable opportunities. However,
while the public capital markets have generally been favorable for selected
REITs during the past few years, there can be no assurance either that the
public markets will remain receptive to providing new capital to REITs and
their operating partnerships or that the terms upon which the Company and the
Operating Partnership may be able to raise funds will be attractive or
favorable to them or to their share owners and partners.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES; RECENT SALES OF UNREGISTERED SECURITIES
On July 31, 1997, Bradley Operating Limited Partnership issued
478,619 limited operating partnership units, exchangeable after January
1, 1999 for a like number of shares of Common Stock of the Company, as
a part of the consideration for the acquisition of County Line Mall.
No registration statement under the Securities Act was required because
the issuance to the seller was a transaction not involving a public
offering (Section 4(2)). At the date of the transaction, the value of a
share of Common Stock for which each LP Unit may be exchanged was
$18.866.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The following Form 8-K was filed with respect to events during the
period July 1, 1997 through September 30, 1997:
1) September 30, 1997 (filed October 6, 1997), reporting in Item 5.
and Item 7., a combined financial statement, consistent with
Regulation S-X, Rule 3.14, for properties accounting for over 50% of
the aggregate acquisition costs of a series of properties acquired
during the period January 1, 1997 through September 30, 1997, in the
aggregate exceeding 10% of the total assets of the Operating
Partnership and its subsidiaries consolidated at December 31, 1996.
16
<PAGE> 17
SIGNATURES
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 thereto duly authorized.
Date: November 14, 1997
Bradley Operating Limited Partnership
Registrant
By: /s/ Thomas P. D'Arcy
---------------------------
Thomas P. D'Arcy
President and CEO
By: /s/ Irving E. Lingo, Jr.
---------------------------
Irving E. Lingo, Jr.
Chief Financial Officer
(Principal Accounting Officer)
17
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