<PAGE>
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 0-23065
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 ___
---
1
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- ------------
ASSETS
<S> <C> <C>
Real estate investments - at cost $660,096 $626,247
Accumulated depreciation and amortization (44,582) (40,574)
-------- --------
Net real estate investments 615,514 585,673
Real estate investments held for sale 54,565 52,692
Other assets:
Cash and cash equivalents 2,505 4,747
Rents and other receivables, net of allowance for doubtful accounts
of $2,777 for 1998 and $2,438 for 1997 14,117 13,038
Deferred charges, net and other assets 18,223 12,641
-------- --------
Total assets $704,924 $668,791
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage loans 50,966 51,227
Unsecured notes payable 199,496 99,783
Line of credit 79,100 151,700
Accounts payable, accrued expenses and other liabilities 28,153 25,361
-------- --------
Total liabilities 357,715 328,071
-------- --------
Minority interest 733 770
-------- --------
Partners' capital:
General partner 327,390 318,845
Limited partners 19,086 21,105
-------- --------
Total partners' capital 346,476 339,950
-------- --------
Total liabilities and partners' capital $704,924 $668,791
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit data)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Income:
Rental income $28,736 $22,855
Other income 619 326
------- -------
29,355 23,181
------- -------
Expenses:
Operations, maintenance and management 4,333 3,333
Real estate taxes 5,481 5,068
Mortgage and other interest 5,558 3,650
General and administrative 1,236 965
Depreciation and amortization 4,963 3,930
------- -------
21,571 16,946
------- -------
Income before gain on sale and provision for loss on real estate investments 7,784 6,235
Gain on sale of property - 3,073
Provision for loss on real estate investment (875) -
------- -------
Income before allocation to minority interest 6,909 9,308
Income allocated to minority interest (43) (23)
------- -------
Net income $ 6,866 $ 9,285
======= =======
Earnings per unit:
Basic $ 0.28 $ 0.42
======= =======
Diluted $ 0.28 $ 0.42
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Limited General Total
Partners Partner Capital
-------- -------- ---------
<S> <C> <C> <C>
Balance at December 31, 1997 $21,105 $318,845 $339,950
Net income 398 6,468 6,866
Cash distributions (484) (8,442) (8,926)
Capital contributions - 8,586 8,586
Reallocation of minority interest 652 (652) -
GP Units issued upon redemption of LP Units (2,585) 2,585 -
------- -------- --------
Balance at March 31, 1998 $19,086 $327,390 $346,476
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,866 $ 9,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,963 3,930
Gain on sale of property - (3,073)
Provision for loss on real estate investment 875 -
Income allocated to minority interest 43 23
Change in operating assets and liabilities:
Increase in rents and other receivables (1,079) (2,173)
Increase in accounts payable, accrued expenses and other liabilities 3,706 191
Increase in deferred charges (20) (626)
--------- --------
Net cash provided by operating activities 15,354 7,557
--------- --------
Cash flows from investing activities:
Expenditures for real estate investments (34,392) (6,119)
Expenditures for capital improvements (3,128) (947)
Net proceeds from sale of property - 11,310
--------- --------
Net cash provided by (used in) investing activities (37,520) 4,244
--------- --------
Cash flows from financing activities:
Borrowings from lines of credit 44,000 5,800
Payments under line of credit (116,600) (14,000)
Proceeds from issuance of unsecured notes payable 99,051 -
Expenditures for financing costs (5,846) (381)
Distributions paid (8,926) (7,484)
Distributions to minority interest holders (80) (30)
Capital contributions 8,586 192
Principal payments on mortgage loans (261) (164)
--------- --------
Net cash provided by (used in) financing activities 19,924 (16,067)
--------- --------
Net decrease in cash and cash equivalents (2,242) (4,266)
Cash and cash equivalents:
Beginning of period 4,747 7,462
--------- --------
End of period $ 2,505 $ 3,196
========= ========
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 2,281 $ 3,641
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Bradley Operating Limited Partnership (the "Operating Partnership") is the
entity through which Bradley Real Estate, Inc. (the "Company"), the General
Partner and owner of a 94% interest in the Operating Partnership, conducts
substantially all of its business and owns (either directly or through
subsidiaries) substantially all of its assets. The accompanying interim
financial statements have been prepared by 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, 1997.
Interests in the Operating Partnership are evidenced by two classes of Unit
holders, general partner units owned by the Company as "GP Units" and limited
partner units evidenced by "LP Units." Governing the Operating Partnership
contemplates that there will always be as many GP Units as there are shares of
common stock of the Company outstanding and that the Company will contribute to
the Operating Partnership the proceeds from all issues of common stock by the
Company. In addition, the holders of LP Units have the right, under certain
circumstances, to exchange their Units for shares of common stock of the Company
on a one-for-one basis.
NOTE 2 - EARNINGS PER UNIT
Basic earnings per unit ("EPU") is computed by dividing income available to Unit
holders by the weighted average number of Units outstanding for the period.
Diluted EPU is computed by reflecting the potential dilution that could occur if
securities or other contracts to issue Units were exercised or converted into
Units or resulted in the issuance of Units that then shared in the earnings of
the Operating Partnership. A reconciliation of the numerator and denominator of
the basic EPU computation to the numerator and denominator of the diluted EPU
computation, is as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31,
--------------------------------------------------------------------
1998 1997
Numerator Denominator Per-Unit Numerator Denominator Per-Unit
---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPU:
Income before extraordinary items $6,866,000 24,736,940 $0.28 $9,285,000 22,257,894 $0.42
Effect of dilutive securities:
Dilutive options exercised - 54,379 - 29,438
---------- ---------- ---------- -----------
Diluted EPU:
Income before extraordinary items $6,866,000 24,791,319 $0.28 $9,285,000 22,287,332 $0.42
========== ========== ======== ========== =========== ========
</TABLE>
For the quarters ended March 31, 1998 and 1997, options to purchase 5,500 shares
of the Company's common stock at a price of $21.25 and 85,500 shares of common
stock at prices ranging from $19.35 to $21.25 were outstanding during each of
the respective quarters but were not included in the computation of diluted EPU
because the options' exercise prices were greater than the average market prices
of the common shares during those quarters.
NOTE 3 - SUPPLEMENTAL CASH FLOW DISCLOSURE
During the first quarter of 1998, 140,651 shares of the Company's common stock
were issued in exchange for an equivalent number of LP Units held by the limited
partners, resulting in an increase of 140,651 GP Units held by the Company.
NOTE 4 - ACQUISITION ACTIVITY
During the first quarter of 1998, the Operating Partnership completed the
acquisitions of five shopping centers located in Indiana, Kentucky, Michigan,
and Wisconsin aggregating 602,000 square feet for a total purchase price of
approximately $33.5 million.
6
<PAGE>
Additionally, during April 1998, the Operating Partnership completed the
acquisition of a 285,000 square-foot shopping center located in Michigan, for a
purchase price of approximately $20.6 million, increasing the total number of
properties owned directly or indirectly by the Operating Partnership to 59,
located in 12 states, aggregating over 11.0 million square feet of rentable
space. The Operating Partnership has several additional property acquisitions
under contract; however, there can be no assurance that any such property
acquisitions will be completed.
NOTE 5 - REAL ESTATE INVESTMENTS HELD FOR SALE
As of March 31, 1998, the Operating Partnership is holding for sale One North
State and Holiday Plaza. The net book value of these properties, $54.6 million,
has been reclassified on the consolidated balance sheet from "Real estate
investments" to "Real estate investments held for sale." The balance at
December 31, 1997, $52.7 million, excluded Holiday Plaza, which was placed for
sale during March 1998 upon the acceptance of an unsolicited offer from a
prospective purchaser of the property. The sale of Holiday Plaza is expected to
be completed in the second quarter, and the sale of One North State is expected
to be completed in the third quarter. However, there can be no assurance that
the sale of either property will be completed. Management currently expects to
use the net proceeds from a sale or sales to reduce outstanding borrowings under
the line of credit with the expectation that the increased borrowing capacity
under the line of credit would be used to acquire additional shopping centers
within the Operating Partnership's target market and that are more in keeping
with the Operating Partnership's strategic focus. The properties held for sale
are no longer depreciated for financial reporting purposes.
NOTE 6 - ISSUANCE OF UNSECURED NOTES PAYABLE
On January 28, 1998, the Operating Partnership issued $100 million, 7.2% ten-
year unsecured Notes maturing January 15, 2008. The issue was rated "BBB-" by
Standard & Poor's Investment Services and "Baa3" by Moody's Investors Service.
The effective interest rate on the unsecured Notes is approximately 7.611%.
Proceeds from the offering were used to reduce outstanding borrowings under the
line of credit.
NOTE 7 - ISSUANCE OF THE COMPANY'S COMMON STOCK
On February 18, 1998, the Company issued 392,638 shares of common stock to a
unit investment trust at a price based upon the then market value of $20.375 per
share. Net proceeds from the offering of approximately $7.6 million were
contributed to the Operating Partnership and were used to reduce outstanding
borrowings under the line of credit.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Subsequent to quarter-end, the Operating Partnership announced the formation of
a co-development program with Oppidan Center Development, LLC, a third-party
developer of Midwest grocery anchored shopping centers. Under terms of the
agreement, the Operating Partnership and Oppidan will work together on all
aspects of the development process and share in the value created from the new
developments. Oppidan will provide substantially all of the financing for the
development process, with the Operating Partnership purchasing the properties
upon completion. The agreement initially includes five properties that are
presently in varying stages of development, the majority of which are expected
to be completed by year-end 1998. Upon completion, these five properties are
expected to have a value of approximately $50 million. The Operating
Partnership currently expects to fund such acquisitions with the line of credit.
7
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Including the gain on sale of property in the first quarter of 1997 of
$3,073,000, and a provision for loss on real estate investment in the first
quarter of 1998 of $875,000, net income decreased $2,419,000 from $9,285,000 in
the first quarter of 1997 to $6,866,000 in the first quarter of 1998. Income
before the gain on sale in the first quarter of 1997 and the provision for loss
on real estate investment in the first quarter of 1998, and before income
allocated to minority interest, increased $1,549,000 from $6,235,000 during the
first quarter of 1997 to $7,784,000 in the first quarter of 1998. Basic and
diluted net income per unit decreased from $0.42 per unit to $0.28 per unit.
The increased number of weighted average units outstanding from the first
quarter of 1997 to the first quarter of 1998 was due primarily to 1,290,000
shares issued in December 1997 in connection with two separate public offerings
of the Company's common stock, and due to the issuance of 392,638 shares of
common stock to a unit investment trust in February 1998, which net proceeds
were contributed to the Operating Partnership in exchange for an equivalent
number of GP Units.
Throughout 1997, the Operating Partnership acquired 25 shopping centers at an
aggregate cost of approximately $189.3 million, and completed the sales of four
shopping centers (including one shopping center sold in the first quarter of
1997) for net sales proceeds of approximately $25.3 million. During the first
quarter of 1998, the Operating Partnership acquired five shopping centers for a
total purchase price of approximately $33.5 million, consisting of the
following:
<TABLE>
<CAPTION>
Acquisitions Date
------------ ----
<S> <C>
King's Plaza, Richmond, IN February 13, 1998
Sagamore Park, West Lafayette, IN March 5, 1998
Oak Creek Centre, Oak Creek, WI March 13, 1998
Midtown Shopping Center, Ashland, KY March 31, 1998
Courtyard Shopping Center, Burton, MI March 31, 1998
</TABLE>
Results of operations for properties held throughout both quarters ended March
31, 1998 and 1997 included 30 properties. Results of operations for properties
purchased or sold subsequent to January 1, 1997 through March 31, 1998 included
32 properties.
Property Specific Revenues And Expenses (in thousands of dollars):
<TABLE>
<CAPTION>
Three months ended Properties
March 31, Acquisitions/ Held Both
1998 1997 Difference Dispositions Periods
------------------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Rental income $28,736 $ 22,855 $5,881 $5,440 $ 441
Operations, maintenance and management 4,333 3,333 1,000 683 317
Real estate taxes 5,481 5,068 413 727 (314)
Depreciation and amortization 4,963 3,930 1,033 909 124
</TABLE>
Results attributable to acquisition and disposition activities:
Rental income increased from $22,855,000 in the first quarter of 1997 to
$28,736,000 in the first quarter of 1998. Approximately $6,774,000 of the
increase was attributable to the Operating Partnership's acquisition activities,
partially offset by $1,334,000 attributable to disposition activities.
Operations, maintenance and management expense increased from $3,333,000 in the
first quarter of 1997 to $4,333,000 in the first quarter of 1998. Approximately
$683,000 of the increase was attributable to the Operating Partnership's
acquisition and disposition activities.
Real estate taxes increased from $5,068,000 in the first quarter of 1997 to
$5,481,000 in the first quarter of 1998. Approximately $727,000 of the increase
was attributable to the Operating Partnership's acquisition and disposition
activities.
Depreciation and amortization increased from $3,930,000 in the first quarter of
1997 to $4,963,000 in the first quarter of 1998. Approximately $909,000 of the
increase was attributable to the Operating Partnership's acquisition and
disposition activities.
8
<PAGE>
Results for properties fully operating throughout both periods:
The remaining increase in rental income of approximately $441,000 represented an
increase of 2.1% over the first quarter of 1997. The increase was primarily due
to increases at the Commons of Chicago Ridge of $204,000, mostly attributable to
the commencement of a 55,000 square-foot lease with JC Penney, and at Har Mar
Mall of $165,000 due to successful leasing activity for approximately 37,000
square feet, or 9% of the Center, since the first quarter of 1997.
Additionally, a new 30,000 square-foot lease with OfficeMax at Grandview Plaza,
a 60,000 square-foot lease with Waccamaw Pottery at Westview Center, both
commencing in the fourth quarter of 1997, and a 40,500 square-foot lease with
Stein Mart at Washington Lawndale Commons commencing late in the first quarter
of 1997, contributed to increases in rental income at these centers of $94,000,
$78,000, and $85,000, respectively. These increases were partially offset by a
decrease in rental income of $225,000 at Sun Ray Shopping Center due to a
reduction in tax recoveries of $210,000 resulting from management's successful
negotiation of an abatement of prior year real estate taxes of $203,000 and a
reduction in real estate taxes of $83,000 from the first quarter of 1997.
The remaining increase in operations, maintenance and management expense of
$317,000, or 10% from the first quarter of 1997, was primarily attributable to
an increase in bad debt expense of $280,000, mostly to reserve a deferred rent
receivable balance for HomePlace at Har Mar Mall, the only center owned by the
Operating Partnership containing a HomePlace store, which declared bankruptcy in
January 1998.
The remaining decrease in real estate taxes of $314,000, a 7% reduction from the
first quarter of 1997, was primarily attributable to the aforementioned
reduction of $286,000 at Sun Ray Shopping Center.
The remaining increase in depreciation and amortization of $124,000 was
primarily a result of the write-off of tenant improvements and leasing costs at
Sun Ray Shopping Center for Marshalls and Coffee Barn, which vacated in the
first quarter of 1998 prior to the expiration of their leases, as well as for
the depreciation and amortization of new construction and leasing costs at
various other locations. These increases were partially offset by a decrease at
One North State, which is no longer depreciated for financial reporting purposes
since it is held for sale.
Non-Property Specific Revenues and Expenses:
Other income increased from $326,000 during the quarter ended March 31, 1997 to
$619,000 during the quarter ended March 31, 1998, an increase of $293,000.
Other income contains both property specific and non-property specific income;
however, the increase is primarily attributable to property specific sources.
The increase in other income resulted from an increase in sales tax sharing
revenue generated at Rollins Crossing, insurance proceeds in excess of the net
book value of assets destroyed and costs incurred for a fire at Grandview Plaza
in 1997, and other income generated from Spring Mall, a shopping center acquired
in December 1997, as well as from various other shopping centers acquired
subsequent to the first quarter of 1997.
Mortgage and other interest expense increased to $5,558,000 for the quarter
ended March 31, 1998 from $3,650,000 during the same period in the prior year,
an increase of $1,908,000. In November 1997, the Operating Partnership prepaid
a $100 million, 7.23% REMIC mortgage note primarily with the proceeds of an
offering of $100 million, 7% seven-year unsecured Notes due November 15, 2004.
Interest on the REMIC mortgage note in the first quarter of 1997 amounted to
$1,808,000. In addition, on January 28, 1998, the Operating Partnership issued
$100 million, 7.2% ten-year unsecured Notes maturing January 15, 2008. Proceeds
from the offering were used to reduce outstanding borrowings under the line of
credit, which had been increased throughout the prior year primarily to fund
acquisition activity. Interest incurred on the unsecured Notes in the first
quarter of 1998 amounted to $3,147,000. A higher weighted average balance
outstanding on the line of credit during the first quarter of 1998 compared with
the first quarter of 1997, partially offset by a lower weighted average interest
rate, resulted in an increase in interest expense on the line of credit of
$153,000. Mortgage debt assumed upon the acquisitions of Spring Mall, Southgate
Shopping Center, and Elk Park in December 1997 contributed to an increase in
interest expense of $415,000. The Operating Partnership's weighted average
interest rate decreased to 6.93% for the first quarter of 1998 from 7.67% for
the first quarter of 1997.
General and administrative expense increased from $965,000 during the quarter
ended March 31, 1997 to $1,236,000 during the quarter ended March 31, 1998, an
increase of $271,000. The increase is primarily a result of the growth of the
Operating Partnership, including increases in salaries for additional personnel,
and franchise taxes and related fees for a larger equity base and expanded
geographic market. Further, the increased focus on acquisition activity
involves costs incurred in the evaluation process which are non-recoverable and
charged to general and administrative expense in the case of acquisitions which
are not consummated. General and administrative expense as a percentage of
total revenue was 4.2% for both quarters ended March 31, 1998 and 1997.
9
<PAGE>
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 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 to
contributors of properties acquired. The Operating Partnership may also acquire
properties through capital contributions by the Company of proceeds from the
issuance by the Company of additional equity securities. Additionally, the
Operating Partnership may dispose of certain non-core properties, reinvesting
the proceeds from such dispositions into properties with better 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 located 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 and of private and public 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. Additionally, the Operating Partnership may engage in
development activities, either directly or through contractual relationships
with independent development companies, to develop community and neighborhood
shopping centers in selected Midwest markets, where value can be created from
new developments more effectively than from acquisitions of existing shopping
center properties.
As of March 31, 1998, financial liquidity was provided by $2,505,000 in cash and
cash equivalents and by the Operating Partnership's unused balance on the line
of credit of $120,900,000. In addition, the Company has an effective "shelf"
registration statement under which the Company may issue up to $201,412,000 in
equity securities, and the Operating Partnership has an additional "shelf"
registration statement under which it may issue up to $100 million in unsecured,
non-convertible investment grade debt securities. Subsequent to quarter-end,
the Operating Partnership filed a further "shelf" registration statement which,
when declared effective, will give it the capability to issue up to $400 million
in non-convertible, investment grade debt securities. The "shelf" registration
statements provide the Company and the Operating Partnership with the
flexibility to issue additional equity or debt 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 March 31, 1998 consisted of fixed-rate notes
totaling $50,966,000 with a weighted average interest rate of 8.18% maturing at
various dates through 2016. Short-term liquidity requirements include debt
service payments due within one year. Scheduled principal amortization of
mortgage debt totaled $261,000 during the quarter ended March 31, 1998, with
another $705,000 scheduled principal payments due for the remainder of the year.
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 $15,354,000 during
the first quarter of 1998, from $7,557,000 during the same period in 1997. The
increase is primarily due to the growth of the Operating Partnership's
portfolio, from 34 properties at January 1, 1997, to 58 properties at March 31,
1998.
For the three months ended March 31, 1998, funds from operations ("FFO")
increased $2,526,000 or 25% from $9,937,000 to $12,463,000. The Company
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 debt restructuring and 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, but does add back to net income significant non-recurring events
that materially distort the comparative measurement of company performance over
time. 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.
10
<PAGE>
Investing Activities
Net cash flows from investing activities decreased to a use of cash of
$37,520,000 during the first quarter of 1998, from a source of cash of
$4,244,000 during the same period of 1997.
During the first quarter of 1998, the Operating Partnership completed the
acquisitions of five shopping centers located in Indiana, Kentucky, Michigan,
and Wisconsin aggregating 602,000 square feet for a total purchase price of
approximately $33,500,000. Additionally, during April 1998, the Operating
Partnership completed the acquisition of a 285,000 square-foot shopping center
located in Michigan, for a purchase price of approximately $20,600,000. The
Operating Partnership has several additional property acquisitions under
contract; however, there can be no assurance that any such property acquisitions
will be completed.
Financing Activities
Net cash flows provided by financing activities increased to $19,924,000 during
the first quarter of 1998 from a net use of cash of $16,067,000 during the same
period in 1997. Distributions (treated as a reduction in cash flows from
financing activities in the Operating Partnership's financial statements) were
$8,926,000 in the first quarter of 1998, and $7,484,000 in the first quarter of
1997.
The purchase price of the five shopping centers acquired during the first
quarter of 1998 aggregating approximately $33,500,000 was funded with cash
provided by the line of credit. Financing for the acquisition completed in April
1998 for approximately $20,600,000 was also provided by the line of credit.
On January 28, 1998, the Operating Partnership issued $100 million, 7.2% ten-
year unsecured Notes maturing January 15, 2008 from a "shelf" registration filed
in September 1997. The January issue was rated "BBB-" by Standard & Poor's
Investment Services ("Standard & Poor's") and "Baa3" by Moody's Investors
Service ("Moody's"). The effective interest rate on the unsecured Notes is
approximately 7.611%. Proceeds from the offering were used to reduce outstanding
borrowings under the line of credit.
On February 18, 1998, the Company issued 392,638 shares of common stock to a
unit investment trust at a price based upon the then market value of $20.375 per
share from a "shelf" registration filed in May 1997. Net proceeds from the
offering of approximately $7,600,000 were contributed to the Operating
Partnership and were used to reduce outstanding borrowings under the line of
credit.
Subsequent to quarter-end, the Operating Partnership filed a further "shelf"
registration statement, that will, when declared effective, increase the dollar
amount of debt securities that it may issue to $400 million.
Capital Strategy
As of March 31, 1998, the Operating Partnership is holding for sale One North
State and Holiday Plaza. The net book value of these properties, $54,565,000,
has been reclassified on the consolidated balance sheet from "Real estate
investments" to "Real estate investments held for sale." The balance at December
31, 1997, $52,692,000, excluded Holiday Plaza, which was placed for sale during
March 1998. The properties held for sale are no longer depreciated for financial
reporting purposes.
One North State is a mixed-use office/retail property located on State Street in
the "Loop" district of downtown Chicago. The property does not fit with the
Operating Partnership's grocery-anchored community shopping center focus and the
Operating Partnership believes, given the current strong investment sales market
in downtown Chicago, that it is an opportune time to sell this asset. The sale
is expected to be completed in the third quarter, although there can be no
assurance that such a sale will be completed. Proceeds received from a sale of
One North State would provide significant additional liquidity to the Operating
Partnership. Management currently expects to use the net proceeds from a sale to
reduce outstanding borrowings under the line of credit with the expectation that
the increased borrowing capacity under the line of credit would be used to
acquire additional shopping centers. Although the spread between the yield
generated by One North State and the immediate and ultimate redeployment of the
sales proceeds will likely be dilutive to earnings in the near term, management
believes the proceeds can be better invested in properties with higher growth
potential and risk adjusted returns, and that are more in keeping with the
Operating Partnership's strategic focus.
Management believes that its ownership of One North State limits the Operating
Partnership's ability to achieve higher debt ratings from nationally recognized
rating agencies because this large mixed-use office/retail property does not fit
with the Operating Partnership's grocery-anchored community shopping center
focus, where management has extensive experience in shopping center renovation,
expansion, re-leasing and re-merchandising. Additionally, redeploying the net
proceeds from a sale of One North State into the acquisition of several shopping
centers would diversify the concentration of risk that results from a single
asset comprising greater than 10% of the Operating Partnership's total rental
income. Upon such time as the sale of One North State is completed, management
expects
11
<PAGE>
to seek an upgrade in the Operating Partnership's debt ratings that, if
received, should result in lowering the Operating Partnership's cost of debt
capital.
Holiday Plaza is a shopping center acquired during 1997 as part of a portfolio
acquisition of five shopping centers, and has been considered by management to
be a non-core property. The Operating Partnership has received and accepted an
offer from a prospective purchaser of the property, with the intention of
redeploying proceeds from the sale toward the acquisition of another property or
properties with higher growth potential. As of March 31, 1998, the Operating
Partnership recorded a provision for loss on its investment in Holiday Plaza of
$875,000, representing the difference between the sales price per the contract,
net of closing costs, and the carrying value of the property. The sale is
expected to be completed during the second quarter, although there can be no
assurance that such disposition will occur.
Management believes that the Operating Partnership's recent growth and operating
performance have enhanced its and the Company's ability to further raise both
debt and equity capital in the public markets and, as indicated above, the
Operating Partnership has positioned itself to take advantage of favorable
opportunities by increasing the dollar amount of debt securities that, when
declared effective, it may issue pursuant to a "shelf" registration statement.
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.
New Accounting Pronouncements
The Operating Partnership has historically capitalized portions of internal
salaries of certain internal personnel dedicated to the acquisition of
properties on a successful efforts basis. On March 19, 1998, the Emerging Issues
Task Force ("EITF") of the Financial Accounting Standards Board ruled under
Issue No. 97-11, Accounting for Internal Costs Relating to Real Estate Property
Acquisitions, that internal costs of identifying and acquiring operating
properties should be expensed as incurred. The pronouncement is effective March
19, 1998. The pronouncement is not expected to have a material effect on the
financial statements of the Operating Partnership.
FORWARD LOOKING STATEMENTS
Statements made or incorporated in this Form 10-Q include "forward-looking"
statements. Forward-looking statements include, without limitation, statements
containing the words "anticipates", "believes", "expects", "intends", "future",
and words of similar import which express management's belief, expectations or
intentions regarding the Operating Partnership's future performance or future
events or trends. Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other factors,
which may cause actual results, performance or achievements of the Operating
Partnership to differ materially from anticipated future results, performance or
achievements expressly or implied by such forward-looking statements. Certain
factors that might cause such a difference include, but are not limited to, the
following: Real estate investment considerations, such as the effect of economic
and other conditions in general and in the midwestern United States in
particular; the continuing availability of retail center acquisitions and
development opportunities in the Midwest; the health of the retail markets
generally, specifically in the Operating Partnership's Midwest markets, and of
the retail tenants of the Operating Partnership particularly; the need to renew
leases or relet space upon the expiration of current leases; and the financial
flexibility to refinance debt obligations when due. The statements made under
the caption "Risk Factors" included in the Operating Partnership's Form 10-K for
1997 are incorporated herein by reference.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable
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 by the Registrant with respect
to events during the period January 1, 1998 through March 31,
1998:
1) January 28, 1998 (filed January 28, 1998), reporting in Item
5. and Item 7., the issuance by Bradley Operating Limited
Partnership of $100,000,000 7.2% Notes due 2008.
13
<PAGE>
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: May 13, 1998
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
14
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,505
<SECURITIES> 0
<RECEIVABLES> 16,894
<ALLOWANCES> 2,777
<INVENTORY> 0
<CURRENT-ASSETS> 34,845
<PP&E> 714,661
<DEPRECIATION> 44,582
<TOTAL-ASSETS> 704,924
<CURRENT-LIABILITIES> 28,153
<BONDS> 329,562
0
0
<COMMON> 0
<OTHER-SE> 347,209
<TOTAL-LIABILITY-AND-EQUITY> 704,924
<SALES> 28,736
<TOTAL-REVENUES> 29,355
<CGS> 0
<TOTAL-COSTS> 9,814
<OTHER-EXPENSES> 6,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,558
<INCOME-PRETAX> 6,866
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,866
<EPS-PRIMARY> 0.28
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