<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 June 30, 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>
June 30, December 31,
ASSETS 1998 1997
--------- ------------
<S> <C> <C>
Real estate investments - at cost $740,540 $626,247
Accumulated depreciation and amortization (48,813) (40,574)
--------- ---------
Net real estate investments 691,727 585,673
Real estate investment held for sale 52,702 52,692
Other assets:
Cash and cash equivalents 1,695 4,747
Rents and other receivables, net of allowance for doubtful
accounts of $2,946 for 1998 and $2,438 for 1997 14,361 13,038
Deferred charges, net and other assets 20,439 12,641
--------- ---------
Total assets $780,924 $668,791
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage loans 55,866 51,227
Unsecured notes payable 199,512 99,783
Line of credit 146,200 151,700
Accounts payable, accrued expenses and other liabilities 32,008 25,361
--------- ---------
Total liabilities 433,586 328,071
--------- ---------
Minority interest 697 770
--------- ---------
Partners' capital
General partner 327,613 318,845
Limited partners 19,028 21,105
--------- ---------
Total partners' capital 346,641 339,950
--------- ---------
Total liabilities and partners' capital $780,924 $668,791
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 3
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Income:
Rental income $30,601 $23,034 $59,337 $45,889
Other income 440 316 1,059 642
--------- --------- -------- --------
31,041 23,350 60,396 46,531
--------- --------- -------- --------
Expenses:
Operations, maintenance and management 4,443 3,666 8,776 6,999
Real estate taxes 5,295 4,559 10,776 9,627
Mortgage and other interest 6,585 3,581 12,143 7,231
General and administrative 1,545 1,012 2,781 1,977
Depreciation and amortization 5,631 3,925 10,594 7,855
--------- --------- -------- --------
23,499 16,743 45,070 33,689
--------- --------- -------- --------
Income before gain on sale and provision for loss on real estate investments 7,542 6,607 15,326 12,842
Gain on sale of property - - - 3,073
Provision for loss on real estate investment - (1,300) (875) (1,300)
--------- --------- -------- --------
Income before allocation to minority interest 7,542 5,307 14,451 14,615
Income allocated to minority interest (43) (23) (86) (46)
--------- --------- -------- --------
Net income $7,499 $5,284 $14,365 $14,569
========= ========= ======== ========
Earnings per unit:
Basic $0.30 $0.24 $0.58 $0.65
========= ========= ======== ========
Diluted $0.30 $0.24 $0.58 $0.65
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
------------- ---------- -----
<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 contribution - 8,586 8,586
Reallocation of partners' capital 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
Net income 393 7,106 7,499
Cash distributions (483) (8,468) (8,951)
Capital contributions - 1,617 1,617
Reallocation of partners' capital 39 (39) -
GP Units issued upon redemption of LP Unit (7) 7 -
-------- ---------- -----------
Balance at June 30, 1998 $ 19,028 $ 327,613 $ 346,641
======== ========== ===========
</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>
For the six months ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,365 $ 14,569
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,594 7,855
Gain on sale of property - (3,073)
Provision for loss on real estate investment 875 1,300
Income allocated to minority interest 86 46
Changes in operating assets and liabilities:
Increase in rents and other receivables (1,325) (1,044)
Increase in accounts payable, accrued expenses and other liabilities 7,137 1,052
Increase in deferred charges (2,037) (1,169)
------------ ------------
Net cash provided by operating activities 29,695 19,536
------------ ------------
Cash flows from investing activities:
Expenditures for real estate investments (108,512) (17,147)
Expenditures for capital improvements (5,309) (3,040)
Net proceeds from sale of property 1,869 11,310
------------ ------------
Net cash used in investing activities (111,952) (8,877)
------------ ------------
Cash flows from financing activities:
Borrowings from line of credit 118,050 20,900
Payments under line of credit (123,550) (20,000)
Proceeds from issuance of unsecured notes payable 99,051 -
Expenditures for financing costs (5,979) (391)
Distributions paid (17,877) (14,974)
Distributions to minority interest holders (159) (66)
Principal payments on mortgage loans (534) (320)
Capital contributions 10,203 309
------------ ------------
Net cash provided by (used in) financing activities 79,205 (14,542)
------------ ------------
Net decrease in cash and cash equivalents (3,052) (3,883)
Cash and cash equivalents:
Beginning of period 4,747 7,462
------------ ------------
End of period $ 1,695 $ 3,579
============ ============
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 8,358 $ 7,241
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
BRADLEY OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 an approximate 95% 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." The Partnership Agreement 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. Subsequent to June 30, 1998, the
Company created and issued a new class of 8.4% Series A Convertible Preferred
Stock and the Operating Partnership created and issued to the Company an
economically equivalent new class of 8.4% Series A Convertible Preferred
Units. See Note 8.
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>
Six Months Ended June 30,
-----------------------------------------------------------------------------
1998 1997
Numerator Denominator Per-Unit Numerator Denominator Per-Unit
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPU:
Net income $14,365,000 24,911,365 $ 0.58 $14,569,000 22,260,759 $ 0.65
Effect of dilutive securities:
Dilutive options exercised - 49,450 - 30,753
----------- ----------- ------------- -----------
Diluted EPU:
Net income $14,365,000 24,960,815 $ 0.58 $14,569,000 22,291,512 $ 0.65
=========== =========== ======= ============= =========== =======
</TABLE>
For the six months ended June 30, 1998 and 1997, options to purchase 153,500
shares of the Company's common stock at prices ranging from $21.25 to $21.35 and
80,500 shares of common stock at prices ranging from $19.35 to $21.25 were
outstanding during each of the respective periods but were not included in the
computation of diluted EPU because the options' exercise prices were greater
than the average market prices of the Company's common shares during those
periods.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------------
1998 1997
Numerator Denominator Per-Unit Numerator Denominator Per-Unit
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPU:
Net income $7,499,000 25,083,874 $ 0.30 $5,284,000 22,263,593 $ 0.24
Effect of dilutive securities:
Dilutive options exercised - 50,014 - 31,258
---------- ----------- ---------- -----------
Diluted EPU:
Net income $7,499,000 25,133,888 $ 0.30 $5,284,000 22,294,851 $ 0.24
========== =========== ========= ========== =========== ========
</TABLE>
6
<PAGE> 7
For the three months ended June 30, 1998 and 1997, options to purchase 153,500
shares of the Company's common stock at prices ranging from $21.25 to $21.35 and
80,500 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 Company's common shares during those
quarters.
NOTE 3 - SUPPLEMENTAL CASH FLOW DISCLOSURE
During the six months ended June 30, 1998, 141,151 shares of the Company's
common stock were issued in exchange for an equivalent number of LP Units. Also
during the six months ended June 30, 1998, the acquisition of a shopping center
included the assumption of $5,173,000 of non-recourse mortgage indebtedness.
NOTE 4 - PROPERTY ACQUISITIONS AND DISPOSITIONS
During the first half of 1998, the Operating Partnership completed the
acquisitions of fourteen shopping centers located in Illinois, Indiana,
Kentucky, Michigan, and Wisconsin aggregating 1.7 million square feet for a
total purchase price of approximately $111.8 million. The Operating Partnership
has several additional property acquisitions under contract; however, there can
be no assurance that any such property acquisitions will be completed. In May
1998, the Operating Partnership sold a 46,000 square foot property located in
Iowa for a net sales price of $1.9 million.
NOTE 5 - REAL ESTATE INVESTMENT HELD FOR SALE
As of June 30, 1998, the Operating Partnership was holding for sale One North
State, a 640,000 square foot mixed-use property located in the "loop" area of
downtown Chicago, Illinois. The net book value of this property, $52.7 million,
has been reclassified on the consolidated balance sheet from "Real estate
investments" to "Real estate investments held for sale." The sale of One North
State was completed on July 31, 1998 for a net sales price of approximately $82
million, resulting in a gain on sale in the third quarter of approximately $30
million for financial reporting purposes. The net proceeds from the sale were
used to reduce outstanding borrowings under the line of credit with the
expectation that the increased borrowing capacity under the line of credit will
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.
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 - SUBSEQUENT EVENT
On August 6, 1998, pursuant to an Agreement and Plan of Merger dated May 30,
1998, the Company completed the merger acquisition (the "Merger") of Mid-America
Realty Investments, Inc. ("Mid-America"). The Merger and the Merger Agreement
were approved by the stockholders of Mid-America at its special meeting of
stockholders held on August 5, 1998. Upon completion of the merger, the Company
acquired Mid-America's interest in 25 retail properties located primarily in the
Midwest. Following the merger, the Company contributed 15 of the properties it
acquired from Mid-America and its 50% general partner interest in Mid-America
Bethal Partnership, a joint venture which owns two neighborhood shopping centers
and an enclosed mall, to the Operating Partnership in exchange for 3,480,210
preferred units of limited partnership interest of a newly created class with
substantially similar economic rights as the newly created 8.4% Series A
Convertible Preferred Stock ("Series A Preferred Stock") issued by the Company
to the Mid-America stockholders in connection with the Merger. The Company
holds title to the remaining seven properties acquired from Mid-America and any
proceeds therefrom for the benefit of the Operating Partnership, increasing the
total number of properties with ownership interests by the Operating Partnership
to 90, located in 15 states, aggregating over 14 million square feet of rentable
space.
7
<PAGE> 8
Pursuant to the terms of the merger agreement each of the approximately
8,286,000 outstanding shares of Mid-America common stock were exchanged for 0.42
shares of Series A Preferred Stock. The Series A Preferred Stock will pay an
annual dividend equal to 8.4% of the $25.00 liquidation preference and is
convertible into shares of Bradley's common stock at a conversion price of
$24.49 per share, subject to certain adjustments. At any time after five years,
the Series A Preferred Stock is redeemable at Bradley's option for $25.00 per
share so long as the Bradley common stock is trading at or above the conversion
price. In connection with the merger, Bradley will assume all of Mid-America's
outstanding liabilities and pay certain transaction costs, making the total
purchase price approximately $157 million. The merger has been structured as a
tax-free transaction and will be treated as a purchase for accounting purposes.
8
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the six months ended June 30, 1998, net income decreased $204,000 from
$14,569,000 in 1997 to $14,365,000 in 1998. For the three months ended June 30,
1998, net income increased $2,215,000 from $5,284,000 in 1997 to $7,499,000 in
1998. Results for the six month period in 1997 included a gain on sale of
property of $3,073,000. Results for the three and six month periods in 1997
included a provision for loss on real estate investment of $1,300,000, compared
with a provision for loss on real estate investment of $875,000 for the six
month period of 1998. Income before the gain on sale and provision for loss on
real estate investments, and before income allocated to minority interest,
increased $2,484,000, or 19%, from $12,842,000 for the six months ended June 30,
1997 to $15,326,000 for the six months ended June 30, 1998. Income before the
gain on sale and provision for loss on real estate investments, and before
income allocated to minority interest, increased $935,000, or 14%, from
$6,607,000 for the quarter ended June 30, 1997 to $7,542,000 for the quarter
ended June 30, 1998. Basic and diluted earnings per unit decreased from $0.65
per unit for the six months ended June 30, 1997 to $0.58 per unit for the same
period in 1998, but increased from $0.24 per unit for the quarter ended June 30,
1997 to $0.30 per unit for the same period in 1998. Weighted average Units
outstanding for the six month period in 1998 were 24,911,365 compared with
22,260,759 for the six month period in 1997. Weighted average Units outstanding
for the three month period in 1998 were 25,083,874 compared with 22,263,593 for
the three month period in 1997. The increase in the weighted average Units
outstanding 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, and the Operating Partnership's issuance to the Company of
like numbers of Units upon the Company's contribution to the Operating
Partnership of the proceeds from such issuances.
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 for net sales proceeds of approximately $25.3 million. During
the first half of 1998, the Operating Partnership acquired 14 shopping centers
for a total purchase price of approximately $111.8 million, and completed the
sale of one shopping center for net sales proceeds of approximately $1.9
million, consisting of the following:
Acquisition and Disposition Activities:
<TABLE>
<CAPTION>
Acquisitions Date
------------ ----
<S> <C>
Kings Plaza, Richmond, IN February 13, 1998
Sagamore Park, West Lafayette, IN March 5, 1998
Oak Creek Centre, Oak Creek, WI March 13, 1998
Courtyard Shopping Center, Burton, MI March 31, 1998
Midtown Mall, Ashland, KY March 31, 1998
Redford Plaza, Redford, MI April 10, 1998
Butterfield Plaza, Libertyville, IL May 13, 1998
Camelot Center, Louisville, KY May 13, 1998
Dixie Plaza, Louisville, KY May 13, 1998
Plainview Village, Louisville, KY May 13, 1998
Bartonville Square, Peoria, IL May 28, 1998
Garden Plaza, Franklin, WI June 10, 1998
Fox River Plaza, Burlington, WI June 23, 1998
Lincoln Park Plaza, New Haven, IN June 26, 1998
Dispositions Date
------------ ----
Holiday Plaza, Cedar Falls, IA May 14, 1998
</TABLE>
Results of operations for properties held throughout both six month periods
ended June 30, 1998 and 1997 included 30 properties. Results of operations for
properties purchased or sold subsequent to January 1, 1997 through June 30, 1998
included 41 properties.
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<PAGE> 10
Property Specific Revenues and Expenses (in thousands of dollars):
<TABLE>
<CAPTION>
Six months ended
June 30, Acquisitions/ Properties Held
1998 1997 Difference Dispositions Both Periods
----------------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Rental income $59,337 $45,889 $13,448 $13,234 $214
Operations, maintenance and
management 8,776 6,999 1,777 1,747 30
Real estate taxes 10,776 9,627 1,149 1,740 (591)
Depreciation and amortization 10,594 7,855 2,739 2,160 579
</TABLE>
Results of operations for properties held throughout both three month periods
ended June 30, 1998 and 1997 included 31 properties. Results of operations for
properties purchased or sold subsequent to April 1, 1997 through June 30, 1998
included 40 properties.
<TABLE>
<CAPTION>
Three months ended
June 30, Acquisitions/ Properties Held
1998 1997 Difference Dispositions Both Periods
----------------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Rental income $30,601 $23,034 $7,567 $7,786 ($219)
Operations, maintenance and
management 4,443 3,666 777 1,079 (302)
Real estate taxes 5,295 4,559 736 1,013 (277)
Depreciation and amortization 5,631 3,925 1,706 1,248 458
</TABLE>
Results attributable to acquisition and disposition activities:
Rental income increased from $45,889,000 in the first half of 1997 to
$59,337,000 in the first half of 1998, and from $23,034,000 for the three months
ended June 30, 1997 to $30,601,000 for the three months ended June 30, 1998.
Approximately $15,261,000 of the increase for the six month period was
attributable to the Operating Partnership's acquisition activities, partially
offset by $2,027,000 attributable to disposition activities. Approximately
$8,579,000 of the increase for the three month period was attributable to the
Operating Partnership's acquisition activities, partially offset by $793,000
attributable to disposition activities.
Operations, maintenance and management expense increased from $6,999,000 in the
first half of 1997 to $8,776,000 in the first half of 1998. Operations,
maintenance and management expenses incurred for properties acquired during the
six month period, net of such expenses eliminated for properties disposed, of
$1,747,000 accounted for substantially all of the increase. For the three month
period ended June 30, 1998, operations, maintenance and management expense
increased $777,000 to $4,443,000 from $3,666,000 for the same period in 1997,
despite incurring a net increase of approximately $1,079,000 due to acquisition
and disposition activities.
Real estate taxes increased $1,149,000 from $9,627,000 in the first half of 1997
to $10,776,000 in the first half of 1998, despite incurring a net increase of
$1,740,000 for acquisition and disposition activities. Real estate taxes
increased $736,000 from $4,559,000 for the three month period ended June 30,
1997, to $5,295,000 for the same period in 1998, despite an increase in real
estate taxes of $1,013,000 due to the Operating Partnership's acquisition and
disposition activities.
Depreciation and amortization increased from $7,855,000 in the first half of
1997 to $10,594,000 in the first half of 1998. Approximately $2,160,000 of the
increase was attributable to the Operating Partnership's acquisition and
disposition activities, and $579,000 was attributable to properties held both
periods. For the three month period ended June 30, 1998, depreciation and
amortization increased to $5,631,000 from $3,925,000 for the same period in
1997, of which $1,248,000 resulted from acquisition and disposition activities,
and $458,000 was attributable to properties held throughout both periods.
Results for properties fully operating throughout both periods:
The remaining increase in rental income for the six month period ended June 30,
1998 of $214,000 was primarily due to increases of $271,000 at Grandview Plaza,
due to the commencement of a 30,000 square-foot lease with OfficeMax in the
fourth quarter of 1997, $188,000 at the Commons of Chicago Ridge, mostly
attributable to the commencement of a 55,000 square-foot lease with JC Penney in
the second quarter of 1997, and $156,000 at Har Mar Mall, resulting from
successful leasing activity during the second half of 1997 and the first half of
1998. Additionally, a new 40,500 square-foot lease with Stein Mart at
Washington Lawndale Commons commencing in
10
<PAGE> 11
the first quarter of 1997 and a new 60,000 square-foot lease with Waccamaw
Pottery at Westview Center commencing in the fourth quarter of 1997 contributed
to increases in rental income of $99,000 and $98,000, respectively, for the six
month period. These increases were partially offset by decreases at Sun Ray
Shopping Center of $433,000 due to a $172,500 termination payment received in
the second quarter of 1997 combined with a reduction in tax recoveries of
$267,000 during 1998 resulting from the negotiation of real estate tax
reductions of $367,000 at this property, and $149,000 at High Point Centre due
to the termination of a lease with T.J. Maxx in the second quarter of 1998. For
the three month period, the decreases at Sun Ray Shopping Center and High Point
Centre, combined with a reduction in tax recoveries of $149,000 at all other
properties held throughout both three month periods resulting from a reduction
in real estate tax expense of $195,000 for such properties, offset the increases
attributable to the aforementioned leasing activities.
The remaining decrease in operations, maintenance and management expense of
$302,000 for the three month period ended June 30, 1998, compared with the same
period in 1997, primarily resulted from a reduction in parking lot repairs of
$292,000 for several properties held throughout both quarters. For the six
month period, this expense reduction was offset by an increase in bad debt
expense reflected in the first quarter of 1998, 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 $591,000, or 7%, for the six
months ended June 30, 1998, compared with the same period in 1997, and $277,000,
or 6%, for the three months ended June 30, 1998, compared with the same period
in 1997, was primarily attributable to the aforementioned reductions of $367,000
and $82,000 for the six and three month periods, respectively, at Sun Ray
Shopping Center, as well as reductions for both the six and three month periods
at One North State, Village Shopping Center, Westview Center and Har Mar Mall.
The remaining increases in depreciation and amortization of $579,000 and
$458,000 for the six and three month periods, respectively, ended June 30, 1998,
compared with the same periods in 1997, were primarily a result of new
construction and leasing at Grandview Plaza, Village Shopping Center, Westview
Center, and Har Mar Mall, combined with the write-off of costs for HomePlace at
Har Mar Mall and Montgomery Ward at Heritage Square. These increases were
partially offset by a reduction at One North State, since depreciation was
suspended for One North State at the end of 1997, when the property was placed
for sale.
Non-Property Specific Revenues and Expenses:
Other income increased from $642,000 in the first half of 1997 to $1,059,000 in
the first half of 1998, and from $316,000 for the three months ended June 30,
1997 to $440,000 for the three months ended June 30, 1998. Other income
contains both property specific and non-property specific income; however, the
increases are primarily attributable to property specific sources, including,
for the six month period, an increase in sales tax sharing revenue generated at
Rollins Crossing and insurance proceeds in excess of the net book value of
assets destroyed and costs incurred for a fire at Grandview Plaza in 1997, and,
for both the six and three month periods, other income generated at Spring Mall,
a shopping center acquired in December 1997, as well as from various other
shopping centers acquired during 1997 and 1998.
Mortgage and other interest expense increased to $12,143,000 for the six months
ended June 30, 1998, from $7,231,000 during the same period in 1997, and to
$6,585,000 from $3,581,000 during the three month period ended June 30, 1998,
compared with the same period in 1997. 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 for the six and three
month periods of 1997 amounted to $3,617,000 and $1,808,000, respectively. In
addition, in January 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 for the six and three month periods of
1998 amounted to $6,829,000 and $3,682,000. A higher weighted average balance
outstanding on the line of credit during the first half of 1998 compared with
the first half of 1997, partially offset by a lower weighted average interest
rate, resulted in increases in interest expense on the line of credit of
$856,000 and $703,000 for the six and three month periods, respectively.
Mortgage debt assumed upon the acquisitions of Spring Mall, Southgate Shopping
Center, and Elk Park in December 1997, and Fox River Plaza in June 1998,
contributed to increases in interest expense of $871,000 and $439,000 for the
six and three month periods, respectively. The Operating Partnership's weighted
average interest rate decreased to 7.20% for the second quarter of 1998 from
7.67% for the second quarter of 1997.
General and administrative expense increased from $1,977,000 during the six
months ended June 30, 1997, to $2,781,000 during the six months ended June 30,
1998, and from $1,012,000 for the three months ended June 30, 1997, to
$1,545,000 for the three months ended June 30, 1998. The increases are
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 that are not consummated. The
Operating Partnership has historically capitalized
11
<PAGE> 12
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 was
effective March 19, 1998.
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 June 30, 1998, financial liquidity was provided by $1,695,000 in cash and
cash equivalents and by the Operating Partnership's unused balance on the line
of credit of $53,800,000. Subsequent to quarter-end, the Operating Partnership
utilized $82,000,000 of net proceeds from the sale of One North State to
pay-down the line of credit, further increasing the capacity on the line of
credit. In addition, the Company has an effective "shelf" registration
statement under which it 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 $400,000,000 in unsecured, 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 June 30, 1998 consisted of fixed-rate notes
totaling $55,866,000 with a weighted average interest rate of 8.14% 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 $534,000 during the six months ended June 30, 1998, with
another $491,000 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 $29,695,000 during
the first half of 1998, from $19,536,000 during the same period in 1997. The
increase is primarily due to the growth of the Company's portfolio, from 34
properties at January 1, 1997, to 66 properties at June 30, 1998.
Funds from operations ("FFO") increased $5,101,000, or 25% from $20,266,000 to
$25,367,000 for the six months ended June 30, 1998, compared with the same
period in 1997, and $2,575,000, or 25%, from $10,329,000 to $12,904,000 for the
three months ended June 30, 1998, compared with the same period in 1997. 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, and after adjustments for
unconsolidated partnerships. Adjustments for unconsolidated partnerships are
calculated to reflect FFO on the same basis. In computing FFO, the Operating
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<PAGE> 13
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 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 use of cash of
$111,952,000 during the first half of 1998, from a use of cash of $8,877,000
during the same period of 1997.
During the first half of 1998, the Operating Partnership completed the
acquisitions of fourteen shopping centers located in Illinois, Indiana,
Kentucky, Michigan, and Wisconsin aggregating 1.7 million square feet for a
total purchase price of approximately $111,783,000. Also, during the first half
of 1998, the Company completed the sale of a 46,000 square-foot shopping center
located in Iowa, for a net sales price of approximately $1,869,000. 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 $79,205,000 during
the first half of 1998, from a net use of cash of $14,542,000 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
$17,877,000 in the first half of 1998, and $14,974,000 in the first half of
1997.
Of the fourteen shopping centers acquired during the first half of 1998,
thirteen were acquired for cash with financing 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 $5,173,000 in non-recourse mortgage indebtedness.
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.
In May 1998, the Operating Partnership filed a "shelf" registration statement,
under which the Operating Partnership may issue up to $400 million of unsecured,
non-convertible investment grade debt securities when management determines that
market conditions and the opportunity to utilize the proceeds from the issuance
of such securities are favorable.
Capital Strategy
As of June 30, 1998, the Operating Partnership was holding for sale One North
State, a 640,000 square foot mixed-use property located in the "loop" area of
downtown Chicago, Illinois. The net book value of this property, $52.7 million,
has been reclassified on the consolidated balance sheet from "Real estate
investments" to "Real estate investments held for sale." The sale of One North
State was completed on July 31, 1998 for a net sales price of approximately $82
million, resulting in a gain on sale in the third quarter of approximately $30
million for financial reporting purposes. The net proceeds from the sale were
used to reduce outstanding borrowings under the line of credit with the
expectation that the increased borrowing capacity under the line of credit will
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.
On August 6, 1998, pursuant to an Agreement and Plan of Merger dated May 30,
1998, the Company completed the merger acquisition (the "Merger") of Mid-America
Realty Investments, Inc. ("Mid-America"). The Merger and the Merger Agreement
were approved by the stockholders of Mid-America at its special meeting of
stockholders held on August 5, 1998. Upon completion of the merger, the Company
acquired Mid-America's interest in 25 retail properties located primarily in the
Midwest. Following the merger, the Company
13
<PAGE> 14
contributed 15 of the properties it acquired from Mid-America and its 50%
general partner interest in Mid-America Bethal Partnership, a joint venture
which owns two neighborhood shopping centers and an enclosed mall, to the
Operating Partnership in exchange for 3,480,210 preferred units of limited
partnership interest of a newly created class with substantially similar
economic rights as the newly created 8.4% Series A Convertible Preferred Stock
("Series A Preferred Stock") issued by the Company to the Mid-America
stockholders in connection with the Merger. The Company holds title to the
remaining seven properties acquired from Mid-America and any proceeds therefrom
for the benefit of the Operating Partnership, increasing the total number of
properties with ownership interests by the Operating Partnership to 90, located
in 15 states, aggregating over 14 million square feet of rentable space.
Pursuant to the terms of the merger agreement each of the approximately
8,286,000 outstanding shares of Mid-America common stock were exchanged for 0.42
shares of Series A Preferred Stock. The Series A Preferred Stock will pay an
annual dividend equal to 8.4% of the $25.00 liquidation preference and is
convertible into shares of Bradley's common stock at a conversion price of
$24.49 per share, subject to certain adjustments. At any time after five years,
the Series A Preferred Stock is redeemable at Bradley's option for $25.00 per
share so long as the Bradley common stock is trading at or above the conversion
price. In connection with the merger, Bradley will assume all of Mid-America's
outstanding liabilities and pay certain transaction costs, making the total
purchase price approximately $157 million. The merger has been structured as a
tax-free transaction and will be treated as a purchase for accounting purposes.
Management expects to integrate the 25 retail properties into the existing
portfolio through the utilization of four existing field offices and a new field
office located in Omaha, Nebraska. The acquisition increases the size and
geographic diversity of the portfolio and tenant base, while furthering the
Operating Partnership's strategic business plan of consolidating
grocery-anchored retail shopping centers in the Midwest.
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 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 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.
Year 2000 Issues
Many existing computer software programs and operating systems were designed
such that the year 1999 is the maximum date that many computer systems will be
able to process accurately. In the conduct of its own operations, the Operating
Partnership relies on equipment manufacturers and commercial computer software
primarily provided by independent software vendors, and has undertaken an
assessment of its vulnerability to the so-called "Year 2000 issue" with respect
to its equipment and computer systems.
After an analysis of its potential exposure to information technology systems,
including the Operating Partnership's accounting and lease management systems,
the Operating Partnership believes that such commercial software is either Year
2000 compliant, or is expected to be Year 2000 compliant no later than December
31, 1998. The assessment was based on formal and informal communications with
the software vendors, literature supplied with the software, literature supplied
in connection with maintenance contracts, and test evaluations of the software.
The Operating Partnership has incurred minimal, if any, costs associated with
bringing its information technology systems to be Year 2000 compliant. Based on
communications with software providers, the Operating Partnership does not
expect to incur significant costs to become fully Year 2000 compliant.
The Operating Partnership is in the process of surveying tenants, suppliers and
other parties with whom the Operating Partnership does a significant amount of
business to identify the potential exposure in the event such parties are not
Year 2000 compliant in a timely manner. At this time, the Operating Partnership
is not aware of any party that is anticipating a material Year 2000 compliance
issue. Although the investigations and assessments of possible Year 2000 issues
are in a preliminary stage, the Operating Partnership does not anticipate a
material impact on its business, operations or financial condition even if one
or more parties is not Year 2000 compliant in a timely manner due to the number
and nature of the Operating Partnership's diverse tenant base, and because the
Operating Partnership does not rely on a concentration of suppliers and other
parties to conduct its business.
In the operation of its properties, the Operating Partnership has acquired
equipment with embedded technology such as microcontrollers, which operate
heating, ventilation, and air conditioning systems, fire alarms, security
systems, telephones and other equipment utilizing time-sensitive technology. The
Operating Partnership is in the process of evaluating its potential exposure to
such non-information technology systems, and expects to be able to complete its
assessment during the third quarter of 1998. However, at this time the
Operating Partnership does not expect to incur significant costs to become Year
2000 compliant in a timely manner.
14
<PAGE> 15
New Accounting Pronouncements
On May 22, 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ruled under Issue No. 98-9, Accounting for Contingent
Rent in Interim Financial Periods, that despite the fact that the achievement of
a future specified sales target of a lessee may be considered as probable and
reasonably estimable at some earlier point in the year, a lessor should defer
recognition of contingent rental income until such specified targets are met.
The pronouncement is effective May 23, 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 financial viability of the Operating Partnership's tenants; the
continuing availability of retail center acquisitions and development
opportunities in the Midwest on favorable terms; the need to renew leases or
relet space upon the expiration of current leases; and the financial flexibility
to refinance debt obligations when due.
15
<PAGE> 16
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
At the Company's Annual Meeting of Stockholders held on May 14, 1998, shares
were voted on the following matters as follows (number of the Company's shares
rounded to nearest full share):
1. Election of Directors:
Nominee For Withheld
------- --- --------
Paul G. Kirk, Jr. 18,786,730 197,968
W. Nicholas Thorndike 18,805,110 179,588
2. Approval of amendments to the Company's 1993 Stock Option and
Incentive Plan as set forth in the Notice and Proxy Statement dated
March 31, 1998 for such Meeting.
For Against Abstained No Vote
--- --------- --------- -------
15,700,217 3,149,044 135,433 4
3. To publish in the proxy statement of the next two consecutive
shareholder meetings (annual) an appendix concerning the charitable
donations program of the Business for the immediate past fiscal year.
For Against Abstained No Vote
--- ------- --------- --------
1,167,577 12,971,126 678,826 4,167,169
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
There were no Form 8-K Reports filed by the registrant with
respect to events during the period April 1, 1998 through
June 30, 1998.
The following Form 8-K Report was filed with respect to events
occurring subsequent to June 30, 1998:
1) July 31, 1998 (filed August 11, 1998), reporting in Item 2. and
Item 7., a combined financial statement, consistent with
Regulation S-X, Rule 3.05, the consummation of the merger
acquisition of Mid-America Realty Investments, Inc. and the
disposition of One North State property. This Form 8-K
inadvertently did not indicate that Exhibit 10.1, Amendment to
Second Restated Agreement of Limited Partnership of Bradley
Operating Limited Partnership dated August 6, 1998 designating
the 8.4% Series A Convertible Preferred Units, was incorporated
by reference to Exhibit 10.1 of the Company's Form 8-K filed
August 7, 1998.
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: August 13, 1998
Bradley Operating Limited Partnership
Registrant
By: /s/ Thomas P. D'Arcy
------------------------------------------
Thomas P. D'Arcy
Chairman and CEO
By: /s/ Irving E. Lingo, Jr.
------------------------------------------
Irving E. Lingo, Jr.
Chief Financial Officer
17
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